The Elephant in the Vault

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In this series, the IOG and Ipsos are teaming up to examine critical challenges facing Canada and a new government. In our first piece, we explored the phenomenon of the ‘wedge solution’ and its impact on decision-making.

Political parties seem to be avoiding a serious discussion on debt and deficits. Talking about reducing the debt is often seen as admitting that they want to cut back government services. It may call into question their ability as political parties to deliver on finely-honed election platforms—whether they call for new spending or tax cuts. Alternatively, if a party views the debt and deficits as unimportant, then it is interpreted as disregarding the need for prudence with taxpayer money.

In the end, political parties find it easier to fall back on political orthodoxy and to blame others for real or imagined mistakes. Debt and deficits do matter, especially for future generations. In this piece, Jim Marshall, Lecturer and Executive in Residence at the Johnson Shoyama Graduate School of Public Policy, explains why we need to move beyond orthodoxy to reasoned debate.

The Elephant in the Vault

By Jim Marshall, Lecturer and Executive in Residence
Johnson Shoyama Graduate School of Public Policy

Canadians are not interested in fiscal policy. A recent Ipsos poll found that only 13 per cent of Canadians rank government deficits or debt among the top three issues in determining their vote in the upcoming election.

The fact is, governments make large decisions about finances that can have a major effect on the lives of citizens, their children and their grandchildren. This effect is precisely why there should be a more active discussion on the importance of government fiscal policies, especially as concerns deficits and debt, before choosing a government.

Governments collect money from all of us through taxes. They also spend our money providing services to people. When a government spends more than it collects in any given year, it incurs a deficit. If it spends less than it collects, it has a surplus. In 2017, the federal government had an operating deficit of just under $9.0 billion dollars on total spending of $309.6 billion1. The federal government spent about 3.0 per cent more than it collected in revenue, or about $246 per person.

When a government has a deficit, it borrows money from financial markets which adds to its debt. Governments also borrow money when they want to build things, like buildings or roads or airports, just in the same way that households borrow money when they buy a new house or a new car.

Deficits and other borrowing add to the debt. At the end of 2017 the federal government had total liabilities — what it owes to other people — of about $972 billion, or about $26,470 per person2. That is the total amount of the debt that has accumulated from deficits and other borrowing since Canada was founded.

As an offset, the government also had bonds and other financial assets that amounted to about $353 billion. Thus, its net debt by 2017 was more like $618 billion or around $16,842 per person3.

So, over history, various federal governments have borrowed about $17,000 dollars on your behalf, or about $67,000 for a family of four.

The CBC reported that in 2017 the average Canadian mortgage was $198,781 and the average Canadian also owed $22,154 in other debts4.

The debt the federal government has incurred on our behalf is about one-third of the size of the average mortgage or about three-quarters of the amount we owe on other debts besides our mortgage.

One should remember that other governments have also borrowed on our behalf. At the end of 2017, provinces, local governments and aboriginal governments owed net debt of about $16,200 per person on top of the federal debt5.

Debt is a deferral of obligations, a promise to pay something in the future, and many people are uncomfortable transferring responsibility forward onto future generations. From a practical perspective, government debt has two key implications.

First, holding debt results in interest costs being paid out of operating budgets and reduces the amount of funding available to provide current services to people. In 2017, the Government of Canada paid out $21.7 billion in interest payment on its debt6, or about 7.0 per cent of its total operating expense.

Had it not been for these interest payments, there would not have been a deficit in 2017 and the government would have had $13 billion available for other purposes. On the other hand, this is interest paid on the total debt accumulated throughout our history, not just the current government. Seven per cent is a small proportion of the total budget compared to the 26.8 per cent of the total spending seen as recently as 1995 and 1996.

The second practical concern about accumulating debt comes from the fact that current borrowing may limit the government’s capacity to borrow in the future, when it might really need to do so. It is difficult to assess the borrowing capacity of a government or to be definitive about how much capacity a government needs for “emergencies.”

A proxy for borrowing capacity is sometimes found in the ratings that are assigned by various credit rating agencies to advise their customers of the “credit worthiness” of various borrowers. A comparison of ratings shows that Canada has the highest possible credit ratings assigned by the top three ratings agencies, a level only found in 11 of the 140 countries examined by the Guardian, a British news organization7.

It would seem Canada’s current debt load does not represent a significant threat to its future capacity to borrow, nor does it require a significant proportion of the budget to service the interest payments.

Some of the complexity in discussing government debt and deficits comes from the very nature of governments.

Unlike businesses and households, governments are essentially immortal. A business may find it no longer has a viable market for its products and no certainty of future revenue. Governments, on the other hand, do not receive their revenue from the sale of goods or services but, generally, through the collection of taxes.

A government will have a source of revenue as long as there is economic activity within its jurisdiction and as long as individuals and businesses are willing or able to pay taxes. Revenue flows will fluctuate with economic activity but it is difficult to see how a government’s source of funds would disappear completely. Therefore, it is possible to consider that, for all intents and purposes, governments will have a “guaranteed” flow of funds to pay interest on its debt and, potentially, to repay the debt.

Households and businesses have no such guarantee of future incomes, and, therefore, do not have the same perspective on debt.

Complexity on the issue of debt is also added from the fact that many of the things governments do are specifically aimed at providing benefits to future generations, perhaps more than the benefits that flow to current generations. Governments build roads or buildings, but many government operating programs are also of great benefit to future citizens. Governments’ support for research activities or maintaining and operating parks and wildlife preserves or museums and cultural facilities and practices provide benefits to future Canadians.

In fact, governments’ capacity to do things today that will have an impact in the future, sometimes referred to as “intergenerational transfers,” is an important feature of developed economies and a major reason why we have worked so hard to develop responsible governments to act on our behalf.

If some of governments’ actions are of benefit to future citizens, it is reasonable to expect those future citizens, through the future tax base, to contribute toward those actions; that is, to support some of governments’ current programs through borrowed funds. We can “transfer” the cost of today’s programs forward onto the beneficiaries of those programs through government borrowing.

There is no formulaic answer to the appropriate level of sharing of costs between current and future program beneficiaries. Thus, the “acceptable” level of public debt should be a subject of legitimate debate as long as democratic processes continue.

As a society, we need to reach a consensus on the level of debt we are prepared to accept and the level of deficit we will tolerate, given that deficits contribute to debt. If we decide that we will not tolerate a deficit of any size, we will have to agree to either reduce current government spending or increase government revenue, or some combination of the two. The consequence of that is either reduced programming or increased taxes.

If we decide that we do not want our governments to hold debt on our behalf, then we will have to repay the debt we already have as well as stop adding to it through annual deficits. Reducing the debt would require the government to run annual surpluses and that means either cutting services further or raising taxes even more.

If we decide not to transfer costs onto future generations, we must bear more of the costs of government services ourselves.

There are good reasons to be vigilant over the level of government deficits and the level of debt they cause. It is our future that is being “mortgaged.” There are reasons to take advantage of the unique capacity of governments to share costs of services and physical infrastructure between generations, but fiscal policy is far too important to leave out of the discussion during an election.

A public debate on these issues is essential if we are to achieve consensus on the appropriate level of deficits and debt to avoid surprise policies after the election.

1 Department of Finance Canada, Fiscal Reference Tables, October 2018, pp. 43-44 at: https://www.fin.gc.ca/frt-trf/2018/frt-trf-18-eng.asp, accessed July 9, 2019.
2 Ibid. p. 55.
3 Ibid.
4 CBC, “Average Canadian mortgage nears $200K, up 5% in a year”, at: https://www.cbc.ca/news/business/transunion-mortgages-debt-1.4256026, accessed July 9, 2019.
5 Department of Finance Canada, op. cit., p.55.
6 Ibid., p.44.
7 The Guardian, DataBlog, at: https://www.theguardian.com/news/datablog/2010/apr/30/credit-ratings-country-fitch-moodys- standard#data, accessed July 9, 2019.

Contributing Author: Jim Marshall

Jim Marshall is currently a Lecturer and Executive-in-Residence at the Johnson-Shoyama Graduate School of Public Policy. Prior to this, Mr. Marshall served in the Public Service of Saskatchewan for 34 years, occupying senior policy and executive positions in the Department of Finance and Industry and Resources and at the Crown Investments Corporation. Prior to coming to Saskatchewan, Mr. Marshall lectured in economics at Brandon University and conducted research at the Library of Parliament in Ottawa. Mr. Marshall has lectured in economics and public policy at JSGS, the University of Regina, Faculty of Administration and the University of Regina, Department of Economics. He is a graduate of Brandon University and the University of Calgary.

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This article is the second in the Governing Past the Next Election series with Ipsos Canada. You can visit the series webpage here.

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Institute on Governance

Institute on Governance

Founded in 1990, the Institute on Governance (IOG) is an independent, Canada-based, not-for-profit public interest institution with its head office in Ottawa and an office in Toronto. Our mission is ‘advancing better governance in the public interest,’ which we accomplish by exploring, developing and promoting the principles, standards and practices which underlie good governance in the public sphere, both in Canada and abroad.

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