An Alternative to Spendathon 2005
Between Ralph Goodale mistaking the federal purse for Santa’s sack and Steve Harper blowing 4.5 billion out the door to make the next plasma TV just a bit more affordable, the idea of fiscal rectitude is very much out of fashion this Holiday Season. But, hey, there is an election to be won.
Here’s what a fiscally sound, politically suicidal, party leader might tell Canadians.
We would love to cut taxes and increase spending. And we will. But we are not going to do it by ignoring our responsibilities.
Canada has a national debt of 499,863 million dollars. Four hundred and ninety nine billion dollars. Ralph Goodale in his pre-election mini-budget made two points:
* Canada’s debt-to-GDP (gross domestic product) ratio is expected to decline to 38.8 per cent in 2004–05, down from 68.4 per cent in 1995–96. * The Government remains committed to reducing Canada’s debt-to-GDP ratio to 25 per cent by 2014–15. (budget overview)While this sounds great it is important to look at the real numbers:
1996 554,162
1997 562,850
1998 560,718
1999 557,871
2000 544,726
2001 524,564
2002 517,545
2003 510,576
2004 501,493
2005 499,863
Last year we paid down a whopping 1.7 billion.
And that is net debt: the actual interest bearing liabilities of the federal government at March 31, 2005 was 615 billion. To get to the 499 billion figure the government deducts certain financial “assets” such as tax accounts receivable with no decernable attempt to “season” such receivables.
Even with low interest rates and a decline in the outstanding debt, Canada has annual debt service costs of 31.8 billion dollars in 2004-5. 17.3% of total federal expenditure. Down from the 32% in 1996-7.
Before we cut taxes we need to drive the debt to much less than 25% of GDP and we need to drive debt service charges below ten percent of the federal budget.
How? Well, three ways: first, no tax cuts. Second, use all but a small percentage of every surplus to pay down the debt. Third, look for program cuts to free more money for debt reduction and economic growth to fuel an increase in the base from which we gather taxes.
Rather than aiming to reduce the debt to less than 25% of GDP by 2014, we should be aiming at the virtual elimination of the debt by 2025.
Instead of throwing away eight billion dollars on pre-election promises or 4.5 billion on a GST cut, we are committed to spending every nickle of that on killing the federal debt. Every dollar of debt paid today is a dollar on which we will never again have to pay interest and that interest can be used to retire more debt.
This year Canada has a ten billion dollar surplus. If that amount was paid against the debt we would reduce our debt service charges by a little less 500 million dollars annually. With reasonable growth, a “hold the line” position on new spending and no tax cuts, in nine years we should have managed to repay at least 150 billion of the current total.
At that point a wonderful thing will happen: the remaining 350 billion dollars will be paid down, depending on the rate of economic growth, in four or five years. Compounding is a lovely thing when it is running in your favour.
Once the debt is paid there will be lots of room for tax cuts and spending programs. More importantly, a resource rich, debt free, hard currency nation is going to be an investment magnet for the rest of the world.
Canada is pretty much the only Western nation which has the potential to be debt free in the near term. It is the only Western nation which has an increasing stock of oil, billions of gallons of clean, pure, water and a highly skilled, relatively homogeneous population.
With an explicit policy of no deficits, significant debt reduction and prudent taxation, Canada could become a safe haven for European money fleeing the collapse of the EU and the Euro and skittish American money worried about the combination of massive trade and budget deficits. We are already seeing some of the effects of this in the appreciation of the loonie. That appreciation will continue.
Canadians need to invest in our future by repaying the debts we have run up in our past. It is not the easy course, just the right one. Our children will thank us.
(Needless to say: there is no chance at all in the current election that any politician is going to say anything of the sort. But voters, at least the ones who are paying a little attention, are may be getting smarter. Being bribed with their own money for no other reason than political opportunism is becoming less and less attractive – especially when both the Liberal and the Conservative party are playing the same con.)
December 4th, 2005 at 8:41 pm
Good article. Of course, now I have to find something else to write about. ;) Expect a link, probably tomorrow.
December 4th, 2005 at 9:23 pm
[...] Then there’s “spend the surplus”, or “we can cut taxes!”. Jay’s dealt with this one very well over at his place – the bottom line is this: we have a debt of $499,863 billion dollars. Out of the federal budget, 17.3% is just debt servicing. Admittedly it’s down from a wopping 32% in 1996-97 but there’s still plenty of room to go. While Jay favours basically holding the line on spending, no tax cuts, and paying down the debts, I’d be willing to go 2/3, 1/3 – two thirds to debt payment, one third to new spending or tax cuts. But I favour spending, since there are a number of underfunded mandates (the military, health care, the Fisheries department, many others.) [...]
December 5th, 2005 at 10:02 am
“Before we cut taxes we need to drive the debt to much less than 25% of GDP and we need to drive debt service charges below ten percent of the federal budget.”
Amen. How anyone can call themself a conservative while advocating tax cuts when there’s a monster debt eating up our tax dollars is beyond me.
December 5th, 2005 at 10:03 am
You say:
“Before we cut taxes we need to drive the debt to much less than 25% of GDP and we need to drive debt service charges below ten percent of the federal budget.”
25% of GDP CAN be achieved by cutting taxes. If taxes are cut, investment and consumer spending will increase, thus increasing the total spending of the economy which then would increase the amount of GDP. IF the GDP increases then ratio of debt to GDP decreases.
Don’t forget that in regards to macroeconomic policies, there are more than one way to get to reach a goal.
December 5th, 2005 at 10:10 am
The only bad debt is foreign owned debt. The rest is simply recycled within Canada. We need to make sure we never have to borrow on international money markets again.
Robert:
The debt is the result of your cherished social programs – unbridled Liberalism – embraced by all from Mulroney to Trudeau and all who came after. Our debt is an indictment of government programs. Government can’t control itself so it shouldn’t have so much control. Government employees demanding more and more money for wages and so they can hire family members. Gun registry costs through the roof – 2,000% over budget.
December 5th, 2005 at 6:34 pm
Ferrethouse,
The debt is not just the result of our government’s social programs. That’s a simplistic answer. It’s important to note that, through the seventies and the eighties, every last one of the G7 nations entered into significant debt. Nixon started the current debt run in the U.S. Carter tried to cut it back, but Reagan expanded it substantially. Thatcher ran a debt. It didn’t matter if you were conservative or socialist; if you ran a western democracy and you weren’t Japan, you ran a debt from 1973 to the mid 1990s.
The economic factors that set us down this path has more to do with North America and Europe’s loss of its manufacturing monopoly to the third world, and the collapse of high-pay, low-skill industrial jobs coupled with the sudden (albeit temporary) departure of cheap oil.
At the time, with stagflation rampant, the only solution to the West’s economic problems was to ask its citizens to do more with less. But the G7 nations, being democratic, found themselves unable to convince the public to accept a prolonged period of high inflation and high unemployment, especially after thirty years of huge economic growth. So the governments were forced to go into deficit—essentially, borrowing against the future in order to try to soften the economic blow that had been delivered in the present.
Our economies have only now shifted away from a low-skill, high-pay manufacturing economy into a high-skill, high-pay information based economy, and for that reason alone, surpluses started to appear in the late 1990s. Japan, which bet heavily on the latter, and ran its 70s and 80s surpluses largely by poaching jobs from North America, now finds itself in deficit, its jobs poached by South Korea, Taiwan and China.
For a fuller explanation of what’s happening, see:
The Myth of the Liberal Deficit and The Myth of the Liberal Surplus.
December 5th, 2005 at 10:24 pm
Why people think we can’t read a spreadsheet is beyond me. In fact the deficits and debts are primarily the result of declining revenues and hugely sprialling debt charges from the late 70’s thorugh most of the eighties. This isn’t supposition on my part, I’ve crunched the numbers.
It may surprise you to hear this, but every western nation underwent the same experience during the same time period.
December 6th, 2005 at 12:47 am
I say there is more than enough room to pay down the debt and give a modest tax cut.
If we could cut all the fat and Liberal corruption out of the govt, we could probably pay off the debt in a couple of years.
December 6th, 2005 at 2:20 am
Before you folks (particularly Robert) get all lathered up about national debts and economic theories, just remember one thing: The Conservatives have to form a government.
That’s what the 5% GST thing, and other announcements, is all about.
We know the Liberals aren’t going to do anything to accerate debt reduction, since they’ve had 12 years to do so. And the NDP has a spend, spend OPM (Other People’s Money) philosophy right down to the last shiny penny, if not more. Think Bob Rae for a moment.
Choose who you like on the ballot, but all the things you talk about can’t be done until the election is over—- any party.
December 6th, 2005 at 2:35 am
“25% of GDP CAN be achieved by cutting taxes. If taxes are cut, investment and consumer spending will increase, thus increasing the total spending of the economy which then would increase the amount of GDP. IF the GDP increases then ratio of debt to GDP decreases.”
Well, yes. And with the growth rate in the Canadian economy a blistering 0% looking to fiscal measures which actually encouraged growth makes sense. And one of the best ways of doing that is cutting taxes. The numbers I speculate about above assume a modest growth rate in the Canadian economy and very precisely targeted tax cuts could be part of that package.
The political problem is that the most efficient tax cuts from a growth perspective don’t go to the poor or the middle class, they go to corporations and the relatively affluent to encourage greater investment in Canada.
One relatively straightforward bit of tax relief would be to reduce or eliminate all taxes on capital gains. Tax the income but not the change in value. This would be good for the stock market but it would be even better for small business and things like rental housing where it would increase the returns and thus the incentives.
But it would not be popular purely because capital gains tax seems to be mainly directed at the rich.