As Chrystia Freeland takes up the duties of federal finance minister, the task before her is daunting. And that, if anything, is an understatement.
Never in our country鈥檚 history have we faced a fiscal crisis like the one now confronting us.
The extent of that crisis is easily shown. Boosted by a huge increase in COVID-19 spending, and plunging corporate earnings, the current year鈥檚 deficit is projected to reach $343 billion. That鈥檚 more than the government鈥檚 entire revenue base.
Freeland鈥檚 dilemma is how to respond. Some of the red ink will likely evaporate as the COVID epidemic lessens, or so she must hope.
But past experience isn鈥檛 greatly comforting. When federal and provincial deficits have ballooned on previous occasions following a recession, it has taken years to get back to firm ground. And those deficits came nowhere near the current melt-down.
Part of the problem is that additional spending intended to counterbalance an economic downturn is often hard to claw back afterwards. Tax relief granted on a temporary basis tends to become permanent.
In either case, walking back such measures involves considerable political risk. And Freeland serves in a minority government. She has limited room to manoeuvre.
That said, where might she begin?
For a start, Freeland might consider tax increases.
Here, two realities come into play. First, personal income tax accounts for half of all federal revenues. If she wants to make a dent, she has to start here.
Yet it would take a tripling of income tax rates to make up the deficit. Clearly that鈥檚 not feasible.
How about an increased tax on wealthy Canadians? This may well be on the cards. But here too, Freeland鈥檚 options are limited.
It has been estimated that raising the marginal tax rate on those earning $200,000 or more, from 33 per cent to 65 per cent, would bring in around $20 billion. That leaves another $323 billion to go.
The problem is that the majority of personal income tax dollars are paid by average Canadians, not the super-rich. Can Freeland sell a whopping tax hike on the middle class? And with a potential election in the offing?
What about a lift in corporate taxes? Again, more than likely. But here too, the gains will probably be modest.
Raising the general corporate tax rate from its current 15 per cent level to 20 per cent could bring in perhaps $15 billion. However what might that do to the business community, already reeling from the COVID epidemic?
Hiking the GST rate to eight per cent from five could increase revenues by around $25 billion.
Yet this is a highly regressive tax, meaning it disproportionately hurts low income families. Is that where Freeland wants to go?
And those are the main revenue options available to her. There are no other taxes that bring in appreciable amounts.
Realistically then, Freeland might be able to raise an extra $50 billion or so, though not without considerable blow-back.
What about spending cuts? Yes, there is some hope here, though not while the virus continues at full strength.
But afterwards? The federal COVID programs cost around $240 billion in additional spending. Suppose Freeland can cut that by 30 per cent next year.
In itself, that鈥檚 no easy task. As well, the prime minister has said he wants to reform social welfare programs when Parliament returns this month. It seems a safe bet that will cost more than it saves.
However if Freeland did reduce COVID spending by one-third, that would shave around $80 billion off the deficit. Couple that with increased tax revenues in the $50 billion range, and the deficit would fall to around $210 billion next year.
Yet that鈥檚 still a staggeringly high figure, far in excess of anything previous federal governments ever faced. And the provinces have their own trench wars to fight.
Realistically, barring an economic miracle, it will take years, perhaps decades, to restore our country鈥檚 finances.
That is the new reality that lies ahead.