Debt Denial: Time to Face our Addiction
Recently, the Canadian Centre for Policy Alternatives (CCPA) released a paper entitled "Bleeding the Patient": The Debt/Deficit Hoax Exposed. As the title suggests, they do not view our crippling national debt with much concern.
The CCPA, a prominent think tank funded by public sector unions, provides an excellent example of debt double talk. I will trace their faulty analysis by refuting the various myths on which they are founded. The fictional narrative about our debt crisis put forth by the CCPA needs to be countered, as the standard of living of the next generation of Canadians hangs in the balance.
Myth #1: Our deficits are an investment in our future.
They could have been but they are not. This myth is typically followed by heart-warming analogies of a home mortgage, which provides benefits for years to come. The inference is that our debt has been productively spent and will yield decades of tangible benefits to all Canadians. Benefits? Since 1984, taxes have increased in real terms by 22 per cent, while real program spending has declined by four per cent.
The critical difference between home owners and the government is that our government has not made an interest payment on the debt for nearly two decades. Such actions by a home owner would lead to foreclosure. Since 1984, the federal debt has risen by $250 billion, nearly exactly the total interest charges on the federal debt ($275 billion) during that time frame. So our deficits are not investments, they are money borrowed to pay the interest on the debt. It doesn't get much more unproductive than that.
Myth #2: Our debt is not large by historical standards.
Debt apologists gleefully point out that in 1946 our government debt was roughly 100 per cent of GNP, as it is today, and that we survived. True enough, except in 1946: 1) there was a huge pent-up consumer demand from the war years; 2) our global competitors lay in ruins; 3) tax levels were extremely low and could be raised; 4) the private sector dwarfed the public sector; 5) borrowing costs on long-term debt were very low; and 6) the deficits were stopped cold turkey in 1947 as the war was over. None of the above six vital realities hold true today. In fact, the opposite is true in every instance. 1993=1946? Unfortunately not.
Myth #3: Don't worry, we owe it to ourselves so it is not really a debt
This often repeated refrain is simply untrue. We do not owe our staggering debt load only to Canadian savers. Fully $280 billion of the $700 billion total government debt (federal, provincial, and municipal) is owed to foreigners. They expect to be paid, and not in Canadian dollars that have been hopelessly watered down by inflationary monetary policies.
Foreigners are getting jittery about our commitment to our dollar, causing much of our provincial and municipal debt to be denominated in foreign currencies. This means no matter how much we destroy the value of the Canadian dollar, we must pay back our debt in foreign currency. Each year we go hat in hand as a nation to the world capital markets, for the simple reason that there are not enough savings in Canada to finance our latest borrowing spree.
Myth #4: The Bank of Canada sets the rate on government bonds. Make them set the interest rate extremely low (i.e., one per cent) and there will be no problem financing the debt.
This argument is utilized to mask a much more draconian agenda. The underlying goal is to force Canadian savers against their will to hand over their savings to the government. How else does the CCPA anticipate anyone buying bonds that do not even pay the rate of inflation? By making it illegal to invest outside the country and forcing 50 per cent of any RRSP/pension plan to be government bonds at one per cent return, the government will be able to refinance much of its debt. The only downside is that the economy will collapse. Policies such as the above reflect a desperate desire to keep the obese government consuming the output of the land at all costs.
Case in point: Sweden. Adherence to the above myths forced Sweden into a cash-flow crisis last year as their budget deficit hit 15 per cent of GNP (Canada's deficit is 5 per cent). The result: short-term interest rates soared to 500 per cent (not a typo) and immediate and huge budget slashing began as the world declined to lend them any more money. Private sector savings had evaporated in the face of marginal tax rates as high as 85 per cent. We ignore the lessons of New Zealand, Sweden, and Finland at our own peril. Clearly, it is time to face our debt addiction head on, rather than engage in the politics of delusion.