On The Money
Excessive government spending, typically rooted in socialist ideology, has long been a contentious issue in economic discourse, with proponents arguing for its stimulative effects and detractors highlighting its detrimental consequences. This article aims to delve deeper into the multifaceted impacts of profligate spending on inflation, debt, employment, and overall economic stability. By examining economic theory, we hope to make clear the long-term implications fiscal imprudence has on society.
One of the immediate consequences of excessive government spending is the inflationary pressure it exerts on the economy. When the government injects large sums of money into circulation through fiscal stimulus programs or deficit spending, as the Government of Canada has, it increases aggregate demand, leading to a rise in prices. This phenomenon, known as demand-pull inflation, erodes the purchasing power of consumers and diminishes their standard of living. Thus, it may come as no surprise to anyone that Canadians are experiencing a lower standard of living today (NBF via Statistics Canada and Bureau of Economic Analysis).
Moreover, excessive spending can also fuel cost-push inflation by driving up production costs. As government demand for goods and services increases, so does the cost of inputs such as labour and raw materials. These higher production costs are often passed on to consumers in the form of higher prices, exacerbating inflationary pressures.
Historical examples abound, such as the hyperinflationary episodes in Zimbabwe and Venezuela, where governments resorted to excessive money printing to finance unsustainable spending commitments. In both cases, the result was runaway inflation, currency devaluation, and economic collapse, underscoring the perils of fiscal imprudence. Many regard these instances as unique to those regions, but there is one underlying commonality and that is the adoption of socialist policies tied to excessive government spending, which led to eventual economic destruction. Canada, too, is undergoing such a gradual change and without a significant course correction it will eventually devolve.
Another significant consequence of excessive government spending is the accumulation of public debt. When governments consistently spend beyond their means, they must finance budget shortfalls by borrowing from domestic or foreign creditors. Over time, this accumulation of debt can become unsustainable, leading to a sovereign debt crisis with severe repercussions for the economy.
High levels of public debt can crowd out private investment, as governments need higher revenues to finance spending and to cover ever growing interest payments. Since investors become wary of lending to governments with precarious fiscal positions, governments are forced to sell their debt at ever increasing interest rates, which then in turn increases interest rates for everyone else, reducing consumer and business borrowing via mortgages, leases, and on credit cards, and thus reducing spending and capital expenditures in the economy. This phenomenon, known as the “crowding out” effect, can stifle economic growth and hinder long-term productivity. Today in Canada we have both extreme government spending and yet a very low gross domestic product, or GDP, growth rate, which means that without the government’s spending the county would technically be, and for all intents is, in a recession.
Moreover, servicing a burgeoning debt burden requires diverting a significant portion of government revenue towards interest payments, leaving fewer resources available for essential public services such as healthcare, education, and infrastructure. This not only exacerbates income inequality but also undermines social cohesion and economic development. The Government of Canada has blatantly ignored spending prudently thus far, which will eventually force it to spend more on interest and less of social services and infrastructure. No doubt, significant cuts will be forced onto the government as the cost of its borrowing continues to rise. Because the Government of Canada has recently provided new nationalized public goods, like day cares, tax rebates, and additional health care services, not to mention massive supports for immigrants, I can predict with near certainty that when the government is forced to cut these public services due to a lack of money, that there will be massive social unrest equivalent to what is typically seen in France – violent public demonstrations that destroy property or worse.
While proponents of government spending often tout its role in creating jobs and stimulating economic activity, the empirical evidence suggests a more nuanced relationship between fiscal policy and employment dynamics. While fiscal stimulus measures may indeed provide a temporary boost to employment in certain sectors, such as infrastructure construction or public works projects, the long-term sustainability of these jobs is often questionable.
Excessive government spending can distort labor markets by misallocating resources towards less productive sectors like expanding government services that could otherwise be provided more cheaply and innovatively by the private sector. Governments tend to support artificially propping up industries, like wind or solar energy production, that are otherwise uncompetitive with oil and natural gas. While an argument can be made for using clean energy, this is a moot point in the face of China and India burning record amounts of coal, wood, and dung as primary sources of energy. Further, the government’s picking of economic winners can impede the process of creative destruction, whereby lower government spending and taxation allows a market demand-based allocation of resources to more dynamic sectors, fostering innovation and productivity growth. Because Canada suffers from both high taxation and extreme government spending, drowning out the private sector, it consistently ranks as one of the least productive G7 nations in the OECD, faring better than only France and Italy.
Moreover, the inflationary pressures associated with excessive spending can erode real wages and diminish the purchasing power of workers, exacerbating income inequality and reducing overall economic welfare. In the long run, these adverse effects can outweigh any short-term employment gains, leading to structural imbalances and economic inefficiencies.
At its core, the impact of excessive government spending on overall economic stability is profound and far-reaching. By distorting price signals, misallocating resources, and undermining investor confidence, fiscal imprudence can sow the seeds of financial instability and economic downturns, and, if unchecked, economic ruin.
High levels of inflation erode the value of savings and investments, discouraging household and business spending and dampening consumer confidence. This can lead to a vicious cycle of declining economic activity, falling asset prices, and rising unemployment, culminating in a full-blown recession or even depression.
Furthermore, the accumulation of public debt creates vulnerabilities in the financial system, as investors become increasingly concerned about the government’s ability to service its obligations. A sudden loss of confidence can trigger a liquidity crisis, as investors rush to liquidate their holdings, leading to a sharp increase in borrowing costs and a contraction in credit availability.
Thus, excessive government spending carries dire consequences for the economy, ranging from inflationary pressures and debt accumulation to employment dynamics and overall economic stability. While fiscal stimulus measures may provide short-term relief during periods of economic downturn, the long-term costs of unsustainable spending commitments can outweigh any temporary benefits. Canadians are, unfortunately, bearing witness to the impacts of successive annual budgets that feature unrestrained fiscal imprudence that will lead to the country’s economic, and thus, societal demise.
Policymakers must therefore exercise prudence and foresight in managing public finances, ensuring that government spending is targeted, efficient, and sustainable. By striking the right balance between fiscal stimulus and fiscal discipline, we can promote long-term prosperity and economic stability for generations to come.
Romel Dhalla, is President of Dhalla Advisory Corp., provides strategic corporate finance advice to companies and high net worth individuals and was a portfolio manager and investment advisor with two major Canadian banks for 17 years. Contact him at [email protected]. Any views or opinions represented in this article are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.
