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Uzelman: “The Dismal Science” and sustainable fiscal policy

A column by Bruce Uzelman
The Bank of Canada is shown in Ottawa on Tuesday, July 12, 2022. THE CANADIAN PRESS/Sean Kilpatrick The Bank of Canada will announce its interest rate decision this morning as economists widely expect the central bank to opt for a quarter percentage point rate hike. The Bank of Canada is shown in Ottawa on Tuesday, July 12, 2022. THE CANADIAN PRESS/Sean Kilpatrick

~BW Uzelman

Thomas Carlyle (1795-1881), a Scottish philosopher, branded economics “the dismal science”. He used the phrase to insult some prominent economists. Today, it has a meaning more in line with Carlyle’s first use of the word “dismal” to describe a theory of Thomas Malthus predicting a coming mass famine.

But economics is hardly a dismal science. Its predictions can be pessimistic or optimistic. An economic theory from the late 1970’s, however, could be termed the dismal theory. It postulated that interest rates do not affect economic variables like inflation unless the rates move unpredictably. Now, if true, a major tool the Bank of Canada uses to fight inflation would be largely ineffective. The result could be unending inflation. The theory appears to be illogical. However, in the midst of an extended period of simultaneously high interest rates and high inflation in the 1970’s and 1980’s, it was viewed as credible.

Today, economists accept that higher rates will bring inflation under control. The Bank of Canada, on January 25, boosted its key policy rate by 25 basis points to 4.5%. The Bank issued a statement that said economies in the U.S. and Europe have been more resilient than was expected, prospects for growth in China had improved and recent growth in Canada was higher than expected. The statement argues the Canadian economy remains in excess demand, though home sales are down and household spending is slowing. It says the slowdown will broaden as the effects of higher rates work through the economy.

The Bank expects growth to stall mid-2023, and forecasts 1% growth for the year and 2% in 2024. It believes core inflation has peaked, and the CPI will decline to about 3% by mid-2023 and 2% in 2024. It credits supply chain improvements, lower energy prices, higher interest rates and quantitative tightening. “The Governing Council,” reads the statement, “expects to hold the policy rate at its current level, while it assesses the impact of the cumulative interest rate increases.” Private sector economists broadly agree with the Bank’s projections. Some think the interest hike is to be the last in this cycle.

Perhaps more troubling than the present problems with inflation are serious concerns with the federal government’s spending levels. David Dodge and Richard Dion, both senior advisors at Bennett Jones, produced a report on the government’s fiscal position. Both men had extensive experience at the Bank of Canada, Dodge as Governor. Speaking to the media, Dodge said, “You’ve got to align what you’re promising with what you’re actually putting real resources behind.” Mr. Dodge is providing the government sensible advice. Stated more directly, don’t promise services you cannot fund.

Dodge and Dion first examine the federal government’s fiscal plan presented in the 2022 Budget. The authors extend the Budget’s assumptions through to 2032. They find, in this scenario, the debt to GDP ratio falls and the interest cost to revenue ratio stays below 10%, as they and most economists advise.

However, the authors say there are “three big risks” to the Budget scenario: First, planned spending is unlikely to be sufficient to satisfy the policy goals. Second, there is a high likelihood of a deeper recession in 2023. Third, inflationary pressures are very likely to continue, as are higher interest rates. These risks, should they materialize in isolation or together, would impact the debt to GDP and the interest to revenue ratios. If significant, the shocks could necessitate added program spending, destabilize the government’s credit rating, increase interest costs and crowd out program spending.

Dodge and Dion seem more concerned with these risks than are the Bank of Canada and independent economists. But the authors’ primary concern, I think, is with a high-spending government. The authors say the purpose of the report is to provide “a guide to sustainable fiscal policy actions.” They describe

the government’s fiscal plan as “plausible, but optimistic”. That is not a vote of confidence. The risks cannot be eliminated. Only the fiscal plan is directly under the control of the government.

The federal government should accept Dodge’s and Dion’s report as a serious warning. At minimum, the government should reevaluate the costs of the numerous new programs announced in the 2022 Budget and since. They should roll back scheduled program expansions where required to maintain the integrity of their fiscal plan, and be very prudent when adding any new expenditures. The economic risks are real. Canada cannot afford to ignore them.

Unfortunately, the Liberal Government is unlikely to heed anyone’s warning. They are likely to continue to spend excessively, as they are accustomed to do. Economics can’t be fairly described as the dismal science, but this government’s economic and fiscal policy is rather dismal.


Bruce W Uzelman

I grew up in Paradise Hill, a village in Northwestern Saskatchewan. I come from a large family. My parents instilled good values, but yet afforded us, my seven siblings and I, much freedom to do the things we wished to do. I spent my early years exploring the hills and forests and fields surrounding the village, a great way to come of age. My parents owned a successful general store. My siblings and I were required to help out in the business, no choices allowed there!

I attended the University of Saskatchewan in Saskatoon. I considered studying journalism at one point, but did not ultimately pursue that. However, I obtained a Bachelor of Arts, Advanced with majors in Economics and Political Science in 1982.

My career has consisted exclusively of small business, primarily restaurant and retail. I was originally based in Alberta, and then BC, first in Summerland, then Victoria and finally Kelowna (for over 20 years). I was married in Alberta, and we have two daughters, who have returned to Alberta as adults for career reasons, as did my now ex-wife. My daughters are successful, and now have families of their own.

I have maintained a healthy interest in politics throughout my adult years, and wish to put that and my research skills to work as a political columnist.


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