Hot! The federal budget and 50 years of Canadian debt

NationalPost.com – news/Budget2011
Mar 21, 2011. Last Updated: Mar 22, 2011.   National Post Staff

In this occasional feature, the National Post tells you everything you need to know about a complicated issue. Today, the federal budget. Finance Minister Jim Flaherty is set to unveil a budget on Tuesday that analysts expect will include a $40-billion deficit, adding to speculation of whether Canada’s debt is under control or spiralling into an abyss depends on whom you ask and what numbers you use. Here, the National Post’s Tamsin MacMahon debunks the federal debt.

How big is Canada’s debt?

The Canadian Taxpayers Federation, which set up its ever-ticking massive debt clock on Parliament Hill last week, declared the country is “broke” and points out that Canada’s debt hit $563-billion, a record and one that wiped out more than a decade of steady reductions with one massive $56-billion federal budget deficit in 2010. However, Canada’s accumulated debt, or the sum of all its budget deficits, translates into about 30% of the total GDP. That makes the country a shining star among struggling G7 economies and represents a drastic decline from the mid-1990s when the federal debt-to-GDP ratio hit nearly 70%. In real dollars Canada’s debt did set a record. But adjusted for inflation, today’s federal debt pales in comparison with the records of the mid-1990s. For instance, the debt in 1996 stood at nearly $769-billion when adjusted for inflation, 25% higher than the present-day debt.

So that’s all there is to it, right?

Not exactly. Other analysts take a different approach to calculating Canada’s debt, putting the debt-to-GDP ratio anywhere from 30% to as high as 80%. For example, by looking at Canada’s gross debt, which includes the debts of provincial governments, but excludes some assets like the Canada/Quebec Pension Plan accounts, Canada’s debt-to-GDP ratio increases to closer to 65%. That increase owes much to Ontario’s skyrocketing debt, projected to be nearly $250-billion by next year (2012), and Quebec’s dismal 50% debt-to-GDP ratio. The International Monetary Fund debt calculations, in contrast, also include unfunded liabilities such as public sector pension funds. Those calculations put Canada’s debt closer to $900-billion and the country’s debt-to-GDP ratio as high as 80%. The Organization for Economic Co-operation and Development excludes employee pension plan future liabilities, but includes current public sector pension plan assets in its calculations, making Canada’s combined federal and provincial debt closer to 30%.

But hasn’t Finance Minister Jim Flaherty pledged to wipe out the debt by 2021?

A In 2006 Mr. Flaherty said he planned to eliminate Canada’s net debt by 2021. Mr. Flaherty’s plan required Canada to reduce its debt by $3-billion a year and for the provinces to balance their books. It sounded like a lofty goal and one that some say has been derailed by the government’s recent stimulus-spending binge. Even so, at the time analysts questioned the significance of Mr. Flaherty’s promise. For one, the net debt is based on OECD debt calculations, which factor in provincial and municipal debt and pension plan assets, but don’t include unfunded public pension liabilities. The organization’s debt calculations are structured in order to compare countries to each other and aren’t necessarily reflective of the true impact of federal debt on the Canadian economy.

Is debt such a bad thing?

How much debt a country should carry is a divisive topic for economists. An informal survey of economists in the 2004 book “Is the Debt War Over?” by the Institute for Research on Public Policy, pegged the ideal federal debt-to-GDP ratio at anywhere from 20-50%. On one hand, high debt can be a drain on the economy and the Canadian dollar and is a drawback for investors. On the other hand, debt can help fund projects that will benefit future generations. Since most government revenue comes from personal and corporate income taxes, some economists argue that these might be kept unnecessarily high if the federal government wants to rid itself entirely of its federal debt, and high income taxes have their own impact on the economy. According to a recent Conference Board of Canada report, The Burden of Being a Responsible Nation in a Turbulent World, while federal and provincial governments should continue to lower their debt burdens, that could have some drawbacks, such as raising the value of the Canadian dollar and flattening the difference between short-term and long-term interest rates. And sometimes being fiscally responsible doesn’t get the recognition it deserves, writes author Glen Hodgson. “Again, Canada could pay a price for living beside a neighbour with serious structural policy weaknesses.”

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8 Comments

  1. You need to take provincial and municipal debt into account as well. It’s easy to cut the federal debt, just stop transferring money to the provinces and municipalities. Provinces can stop funding municipalities, and so property owners are stuck paying the bill at the municipal level, or services are cut. This is what Reagan did in the US; it’s what Paul Martin did federally, and what Mike Harris did in Ontario.

    So, let’s see graphs for total public debt as a %of GDP, and total tax grab as a % of GDP.

  2. What still remains is that Conservatives in Canada and Republicans love to spend and waste tax dollars while reducing the taxes of the wealthy and big corporate interest which results in huge deficit spending and the accumulation of intolerable national debt while they are in office.

  3. Well it doesn’t really matter who or what level of Gov. is spending more then they take in on Taxes,what we need is a better method of controlling the over spending Goverment. What this chart didn’t show was P.E.T. was really the big spender but it didn’t show up until later, because of compounding interest.

  4. dj, you’re like Rudy Giuliani. Your contribution consists of a noun, a verb, and P. E. T.

    If the chart doesn’t show something about Canada’s debt, it’s because that something exists only in your mind.

    Conservatives have been overwhelmingly responsible for Canada’s debt. You won’t accept that because it conflicts with your emotion driven beliefs.

  5. First off you can not include Provincial debt loads into the Federal because the federal government does not control how individual provinces spend thier money. The Liberals did the majority of high spending, there are other sites that are saying the samething.

  6. @Joe Hilbig,
    you also need to know other factors during this time!
    You need to quit looking at thing at a superficial level.
    The loss of government revenue and inflation adds to the debt.

    Consider the messed up Canadian economy from PET with double digit inflation and unemployment. The global recession during the 1980’s, US housing bubble burst which was worse than 2008.
    Carter did the same thing in the US. Currently in the US the cost of bailing
    out if banks that which was not needed and refusing to regulate Fannie and Freddie will cost the US >$10T. The loss of federal government revenue is about $400B-$600B per year, which is added to the US debt and the inflation which will ensue may bankrupt the US.

  7. Does your blog have a contact page? I’m having a tough time
    locating it but, I’d like to send you an e-mail.
    I’ve got some suggestions for your blog you might be interested in hearing.
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  8. @Honest and @Joe Hilbig,

    Every government is saddled with the spending programmes intoduced by the previous government(s). P.E.T brought in many expensive government spending programmes which drove inflation and extremely high interest rates. The conservatives which followed (Mulroney) weren’t able to ‘take the candy away from the babies’ all in one fell swoop. Every time they tried to cut some government spending, the socialist hoards where rioting in the streets.

    Those government spending programmes (introduced by P.E.T.), along with record high interest rates on the debt, and a collapse of the Canadian economy in the early 80’s resulted in extremely high government costs and reduced revenues; therefor, higher government deficits and rising debt.

    With regards to governments being ‘saddled’ by programmes of previous governments, if it weren’t for Free Trade and GST (introduced by the conservatives) Chretien/Martin wouldn’t have been able to wrestle down the federal deficit. Also, the IMF was knocking at the door telling Chretien/Martin to get their finances under control or else they would lower Canada’s credit rating; effectively increasing debt financing and decreasing Canada’s ability to borrow. Aswell, the Liberals were, quietly, behind the scenes, encouraging the Reform party members to continue pounding the talble for fiscal responsibility so as to support any moves by the Liberals to rein in federal spending.

    To ignore parts of the picture which don’t support your bias is the true emotional driven belief.

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