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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