A massive increase in government spending to underpin impacted businesses and workers. A massive intervention in the private sector, closing non-essential businesses and appealing to manufacturers to pivot to meet a new enemy.
It’s no wonder that government actions nationwide have sparked comparisons to the ramping up of the war economy during World War II, when Ottawa turned on the spending taps and brought the private sector into what came to be virtually a command-and-control economy.
The measures then amounted to much more than what’s being done now. But Ottawa had five years to act. What Ottawa did in March, especially in fiscal terms, does roughly compare to what Ottawa did at the beginning of the war.
Expenditures: The federal deficit will rise to well over $100-billion, according to a report by Parliamentary Budget Officer Yves Giroux. But the estimate of $112.7-billion for this fiscal year doesn’t include measures announced at the end of the month, such as an increase in the temporary wage subsidy to 75 per cent, meaning the deficit estimate is sure to rise further.
The PBO report – termed illustrative since forecasts are so uncertain — pegs revenues at $310-billion, a decline of $40-billion since last fall. Program spending is to rise to $401-billion, an increase of more than $50-billion. (Debt charges decline marginally given interest rate reductions.)
The deficit is forecast, in other words, to approach 30 per cent of total spending, which is just where it was in 1940/41 – a year when government spending almost doubled after the outbreak of war in September, 1939.
In other ways, comparisons are at least premature. Ottawa’s spending was almost eight times higher at the end of the war than at the beginning. And the additional spending was exclusively on the war. The military took just over one dollar in six in 1939/40; in 1944/45, war expenditure was well over five dollars in six.
Government also grew massively in terms of its share of the economy. Ottawa’s expenditures peaked at more than 45 per cent of GDP. The PBO scenario estimates 2020/21 spending at 18.5 per cent of GDP.
How was war spending financed? Not by taxes, though citizens and corporations did pay more, including an “excess profits” tax. It was by borrowing; the federal deficit ballooned to 50 per cent during the years of maximum war effort – 1942/43 to 1944/45.
At war’s end, federal net debt was more than 100 per cent of GDP, from about 40 per cent when hostilities began. But this declined quickly as peacetime returned; in 1947, the budget surplus was already at a record level.
Today, Canada’s net debt is 30.6 per cent of GDP and the PBO report suggests it will grow to 38.1 per cent this year. (This remains well below the modern peak of 66.6 per cent in 1995/96.)
Intervention: A newspaper article from November 21, 1940 posted on the Canadian War Museum website illustrates where priorities were almost 15 months after the declaration of war: “New Models Ended as War Production Close to Capacity.”
Ottawa had just banned updated consumer goods – cars, radios, washing machines, typewriters, the list went on – to focus all attention on the war. In the words of C.D. Howe, the minister of munitions and supply, “the economic wastage of machines and men, which mere whims, fads and fancies of fashion often produce,” was to be avoided.
Howe was vested with powers unprecedented since Confederation. He was responsible for all war purchases and controlled the supply of essential materials. He could take over existing stocks, regulate distribution, cancel contracts and shift factories and warehouses to war production. If he wasn’t satisfied with a plant’s output, he could appoint a controller to do better.
Nothing escaped Ottawa’s attention. In 1942, the wartime prices and trade board ordered that all cups be made without handles to save on capacity. If a cup was too hot to hold, the board surmised, the beverage was too hot to drink.
More than two dozen crown corporations were created. Unemployment fell 10 percentage points over the war years, to barely 1 per cent, as the size of the economy more than doubled. (Howe predicted that the war would transform Canada from an agricultural economy to an industrial economy, and it did. The rural population dropped well below 50 per cent from 1940 to 1945.)
Again, let’s shift to today. Governments have intervened hugely, but in circumstances where unemployment is projected to jump to 15 per cent later this year, according to the PBO report.
The Ontario government has now moved to centrally manage public sector supply chains, to better track inventories, identify constraints and prioritize where supplies are needed most. It also issued an order to combat price gouging on what it deemed necessary goods – from soap and toilet paper to medical protective equipment such as masks and gloves. The B.C. government took supply chain measures days earlier and, like Ontario and Quebec, has defined essential services for purposes of what is allowed to remain open and closed.
Is a war comparison apt, then, judged from the perspective of a weeks-long fight against COVID-19? Differences are apparent. The command-and-control economy was established to focus all effort on winning the war; an unintended consequence was that Ottawa also became guarantor of economic demand. Today, Ottawa’s primary intention is to use the power of government to maintain demand until private efforts can step back in.
How sustained this will be and how much this will cost depends on how long the crisis lasts. But governments, certainly, are committed to this path.
Drew Fagan is a professor at the Munk School of Global Affairs and Public Policy, University of Toronto, and a Senior Advisor at McMillan Vantage Policy Group
This piece was also published by the Munk School of Global Affairs and Public Policy.