Liberal-NDP alliance reeks of a political stunt
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The new governance agreement between the federal Liberals and NDP is, for the most part, a gimmick. It won’t change much in Parliament over the next three years, other than it might result in higher government spending.
The two parties have agreed that if the government pursues a number of policy objectives — including a national pharmacare plan and a dental program for low-income Canadians — the NDP will prop up the Liberals and prevent an election prior to 2025.
However, it’s not binding. Either party is free to walk away from it at any time.
The Liberals could call an election prior to 2025, if it’s in their best interest. The NDP could back a non-confidence motion if it suits their needs. Either side can claim the other is not living up to its end of the bargain and the deal is off.
New Democrats have been propping up the Liberal minority government since 2019. Because they have no desire to return to the polls (they’re broke and their political fortunes are dim), they were expected to back the Liberals anyway for at least the next two years.
It’s not much different for the Liberals. After two elections in two years, Prime Minister Justin Trudeau has no appetite to dissolve Parliament, at least not before 2024 (three years after the last election). By then, the agreement announced this week will be virtually meaningless.
That’s not to say it won’t have some impact in the short term. It will likely embolden the Liberals to spend more than planned. Trudeau doesn’t need much coaxing when it comes to loosening the government purse strings. Trudeau and Finance Minister Chrystia Freeland are comfortable with the idea of long-term deficit financing. The Liberals have not balanced the books since coming into office in 2015 and have no plans to do so for at least the next five years. It’s not a priority for them.
Going deeper into deficit is not a major sacrifice for the Liberals. In fact, they’re likely happy to do it, which is not necessarily good news for Canadians.
Federal government debt had ballooned to $1.117 trillion as of Dec. 31, 2021 and is expected to climb to $1.4 trillion over the next four years. It has doubled since the beginning of the COVID-19 pandemic.
While the debt is projected to be on a slight downward trajectory as a percentage of GDP over the next four years, it’s expected to hit 48 per cent in 2021-22, well above the 31 per cent it was at prior to the pandemic. The cost of servicing that debt is just over $40 billion a year. It could reach higher levels under a more aggressive Liberal-NDP spending program.
Bond rating agencies haven’t sounded the alarm bells yet by threatening to downgrade the federal government’s credit rating. However, without a long-term plan to balance the books, a downgrade may not be far off (which would drive up borrowing costs).
More importantly, any plan to boost spending beyond current projections would likely contribute to higher inflation rates, which are at levels not seen since the early 1990s. One of the biggest challenges facing G7 countries this year is ensuring governments do not work at cross purposes with their central banks, most of which are planning multiple interest rate hikes to control inflation. Governments have to be mindful not to undermine those efforts through expansionary fiscal policies. The higher the stimulus spending, the greater the inflationary pressures.
Price inflation is a global problem driven by a multitude of factors, including supply chain disruptions, changing consumer spending habits during the pandemic (from services to goods), and Russia’s invasion of Ukraine.
Still, government spending is an important element many economists have warned could drive up inflation further if not properly managed.
So, what’s in this political deal for the Liberals and the NDP? Not much. Both parties are trying to create the perception they’re bringing stability to Parliament by working collaboratively in the best interest of Canadians. They may score some short-term political points, but this is politics: it won’t be long before the parties are back at each other’s throats.
If this ends up just being an excuse to open up the spending taps, Canadians could pay a steep economic price.
Tom has been covering Manitoba politics since the early 1990s and joined the Winnipeg Free Press news team in 2019.