The Federal Budget
Over the course of the next 3 months, there will be many lightning rod issues debated among the political parties. But the one that always surfaces during every federal election campaign is the budget – particularly budgetary deficits.
Currently Canada’s national gross debt is pushing $1.2 trillion, which does not include provincial or municipal debt. However some of that debt has been used to buy hard assets, like real estate or vehicles or office equipment. But even if Ottawa sold all these assets so they owned absolutely nothing then used that cash to pay down the debt, they would still end up owing their creditors $671.3 billion.
Now when this type of scenario happens to an individual or a corporation, we call it bankruptcy. But we all know this isn’t going to happen to a country, right? If our lenders called all our loans today and we couldn’t pay, nobody is going to seize our land and take Canada from us.
If that’s the case, then, why should we even worry about our national debt? Well, although countries can’t go bankrupt, they can default on their loans if their debt becomes unmanageable. In these instances, a country would go to its creditors and “renegotiate” the terms of the loan. This may sound somewhat painless, but in actuality there are several scenarios that could be very problematic.
1. Loss of confidence in the country’s financial institutions. This would result in a run on the banks that would force the government to limit withdrawals. Such was the case in Greece in 2015 when citizens were only permitted to withdraw a maximum of $100 per day from their bank account.
2. Print more money. The government could create extra cash to make its loan payments, but this would also lead to a devaluation of the currency and hyper-inflation. Our loonie might become 50 cents to the US dollar and the cost of imported goods like iPhones, prescription drugs, televisions, and furnishings would skyrocket.
3. International lenders demand higher interest rates. Because of the higher risk in loaning us money, lenders would expect a higher reward. The result would be to increases our annual interest payments either putting us further in debt or requiring some government program cost-cutting to offset the extra budgetary expense. Perhaps subsidized daycare goes out the window, or Employment Insurance gets cut in half.
4. Borrow money from the International Monetary Fund (IMF). This is a more drastic measure, but it would provide the government with a bridge loan to cover its debt payments. However if the IMF steps in, it would want to be proactively involved in a country’s financial management (or mismanagement) and so it would impose all kinds of conditions on these loans. Usually those conditions involve strict austerity measures to force a country to become fiscally responsible. It could be cutting government pensions, reducing universal health care, eliminating maternity leave, or all kinds of things that we as Canadians have felt are our rights as citizens and tax payers.
So with these potential threats looming over our head, why has the government not been serious about reducing our debt? The smokescreen we often hear is comparing our national debt to Gross Domestic Product (GDP). GDP is the monetary value of all the goods and services produced within Canada over a fixed time period. Currently our debt to GDP ratio is about 30%, which sounds manageable. But the fallacy is we are measuring the federal government debt against the income of the entire nation. This would be equivalent to me measuring my personal indebtedness to the income of all of Richmond and concluding those combined resources were sufficient to comfortably manage my personal payments.
To be more accurate, we should take government debt and compare it to the federal government’s annual income. In this scenario the ratio jumps from 30% to 200% - double the government’s yearly revenue. In other words, if Ottawa continued to tax us at our current rate but closed its doors and spent absolutely nothing for 2 full years, then it would barely manage to pay off the debt! (For a fuller explanation you can read this article from Forbes magazine).
There’s also a second smokescreen we fall for – that’s the sleight of hand in mixing “debt” and “deficit”. The “debt” accumulates over the years whereas the “deficit” applies to only one year’s worth of spending and is added annually to our total “debt”. So the head-scratcher for me is when governments quite proudly announce their intent to balance the budget and eliminate the “deficit”. This is not eliminating the “debt” as some people seem to think. Balancing the budget simply means not increasing the debt. Yes, we’re not adding to the problem, but we haven’t taken any steps to fix the problem. If a government really wanted to address the situation and help manage our risk, they should be focussed on creating surpluses each year and thus reducing the debt. But that would require not only living within our means, but actually being frugal and saving some money. We would still be paying the same taxes we are now, but with the realization that we can no longer expect the same level of benefits we’ve become accustomed to – some serious belt-tightening.
But no political party is going to run on that platform. That’s a sure way to lose. How many voters would sign up for that kind of financial pain? No, it’s easier to kick the can down the road and leave the problem for our children and grandchildren to solve. (As an aside, as much as I support those who are concerned about leaving a cleaner environment for future generations, it would also be nice to see an equal concern to leave them a cleaner balance sheet!)
But, if no one is prepared to endure the pain of fixing the problem, can we at least agree not to make it worse? That would mean committing to balancing the budget and foregoing the easy vote-getting promises of lavish spending and running a deficit.
In the last election campaign, Justin Trudeau promised a balanced budget by 2019. It didn’t happen. In fact over the past 4 years of his term he has increased our national net debt by 10%, adding another $70 billion to it.
But what’s concerning is that the Liberal Party has publicly stated that they expect to add another $56.4 billion to that debt if they get elected again! That would make Justin Trudeau personally responsible for over 18% of our national debt by the time the next election comes around in 2023. Of course, that’s under the assumption he would keep his promise this time around.
As to the other side, traditionally the Conservative party has run on a platform of a balanced budget. Admittedly they have not always achieved that - sometimes due to circumstances beyond their control like the global recession in 2008. Even in this election, Andrew Scheer isn’t guaranteeing a balanced budget in his first term should he get elected. Sometimes reducing waste and introducing a bit of fiscal pain needs to be a gradual process. But he does insist the budget will be balanced by term two. Of course we have heard that promise before!
So there you have it. When we examine our fiscal house on paper, it’s not a very pretty picture. Looking at our lifestyle and the things we enjoy, though, most people wouldn’t think there were any problems. We appear affluent and well-cared for – and compared to most of the world we are. But that affluence is being bought with borrowed money and as the old farmer used to say, at some point the chicken comes home to roost!
Richmond Centre Conservative Association
(Photo Source: https://www.cbc.ca/news/politics/scheer-balanced-budget-trudeau-deficit-von-scheel-1.4910803)