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Premier Brian Pallister says he has no choice but to slash spending during the COVID-19 pandemic to limit the debt load on future generations. However, the cuts he’s proposing today would have little bearing on tomorrow's debt.

Like all governments in Canada, Manitoba expects to borrow billions more than planned in 2020-21 to replace lost revenue and cover rising costs due to the novel coronavirus pandemic. The province estimates new borrowings of about $5 billion.

The province’s net summary debt, which excludes Manitoba Hydro, was projected, pre-pandemic, to only rise by $769 million in 2020-21 — a testament to the spending controls the Pallister government put in place from 2016 to 2019.

Net debt was rising about twice that rate under the previous NDP government, during relatively good economic times. Had that continued, the province would have had less borrowing capacity to respond to the pandemic.

The province has more borrowing capacity than Pallister is letting on.

Manitoba Premier Brian Pallister is using his aversion to debt to justify cuts to education and the civil service, but those are hardly significant when set against the scope of the economic damage from pandemic. (Ruth Bonneville / Winnipeg Free Press files)

Normally, no administration would contemplate taking on as much debt as governments are proposing to fight the pandemic, but like all provinces, Manitoba has little choice. The lost revenue from taxes and fees will be in the billions of dollars. Add to that hundreds of millions in unexpected health-care costs (as well as other unbudgeted expenditures such as business subsidies) and the estimated $5 billion in new borrowing will be easily reached.

If so, it would increase the province’s net debt to slightly more than $31 billion, up from the $26.4 billion projected before the pandemic.

Now, the question is: would saving a few hundred million dollars by cutting funding to post-secondary institutions and other taxpayer-supported organizations — while also laying off civil servants or cutting their wages — put much of a dent in the province’s future debt?

Not really.

The most common and meaningful way to gauge government debt is to measure it as a percentage of the economy (called net debt-to-GDP). If the province’s net debt were to hit $31 billion this year, its debt as a percentage of the economy would rise substantially. No one knows how much, because it would depend on the degree to which the economy contracts.

The question then becomes: is Pallister’s austerity plan reasonable given the economic harm it would cause not only today, but in years to come?

In 2019-20, the province’s net debt-to-GDP was estimated at 34.3 per cent ($25.67 billion in an economy of $74.87 billion). That’s around middle-of-the-pack compared with other provinces.

If, for example, Manitoba’s nominal GDP were to shrink by five per cent this year, $31 billion in net debt would drive the province’s debt-to-GDP to 43.6 per cent. That would be the highest it’s been in modern economic times. However, it would still be manageable, especially with historically low interest rates.

By comparison, it wasn’t until the federal government’s debt-to-GDP reached 67 per cent in 1995 that Ottawa hit the panic button and started slashing spending. That was also done during a period of economic growth.

If Manitoba were to increase borrowing by $6 billion this year to avoid spending cuts and to beef up fiscal support for the economy, Manitoba’s debt-to-GDP would grow to 45 per cent (assuming the same five per cent GDP decline).

In other words, if the province borrowed $1 billion more than the $5 billion it's already projecting, it would only increase the debt-to-GDP ratio by less than two percentage points. Over the long run, as debt is managed and repaid over the next generation, that’s statistically insignificant.

The question then becomes: is Pallister’s austerity plan reasonable given the economic harm it would cause not only today, but in years to come?

Slashing spending to public institutions such as universities and failing to provide the necessary fiscal support during an economic crisis would have significant, long-term implications. The more businesses and not-for-profit organizations fail this year, and the higher the unemployment rate, the longer and deeper this economic downturn will last.

Government austerity during severe economic contractions has never worked.

It won’t end well for Manitoba if Pallister insists on taking this route.

tom.brodbeck@freepress.mb.ca