By Theo van de Kletersteeg

By now we all know that somewhere along the line, the Trudeau government decided to abandon its 2015 election campaign promise to balance the federal budget by the time voters go to the polls again in 2019. Instead, Liberals plan to continue their deficit spending and related borrowing, with Bill Morneau, our Finance Minister, saying that “Every responsible leader knows that a good plan has to be flexible enough to absorb the changes in circumstances because circumstances always change.” Really! With an economy that, to be sure, has its problems, but which nonetheless has produced ever-decreasing rates of unemployment and great corporate profits, the only “changes in circumstances” that I see are higher than anticipated revenues for the federal government and most provincial governments. So how could we go from a projected federal balanced budget to an $18.1 billion federal budget deficit that is now projected for the fiscal year ending March 31, 2019? And why is it that deficits are now projected “forever”?

For a closer look at what this all means, let’s take a look at how we got here.

In 1867, net federal debt was $75.7 million. During the nation-building phase of the Canadian economy from 1867 to 1913, which entailed the subsidized construction of transcontinental railways and the settlement of the West, net federal debt grew to $314.3 million. As a result of the First World War and the Great Depression, net federal debt rose to reach $3.1 billion by 1938. And by 1945, net federal debt jumped to $11.3 billion as a result of the cost of the Second World War. Post-war expenditures on infrastructure and the introduction of new social programs caused continued growth of the federal debt, and the 25 years between 1945 and 1970 saw the debt reach $20.3 billion. Federal net debt surged from $107 billion in fiscal 1982 to over $651 billion for the year ended March 31, 2018.

The period since 1970 has witnessed slower economic growth, and lengthy periods of stagnation and recession. Early on, Canada’s resource-based export machine began to sputter and later on during this period, globalization and loss of international competitiveness caused major industrial disruptions, and social upheavals. Except for the decade that ended with the fiscal 2009 year, governments of the day refused to moderate the expectations of the population, and borrowed huge sums to perpetuate the illusion that Canada could actually afford all the social programs that had been introduced and that kept on growing. Successive deficits combined with high interest rates saw federal debt rise to reach a peak of $563 billion in 1996. With the financial crisis and recession of 2008-09, federal debt began to rise again and by 2015 had reached a new all-time high of $612.3 billion.

Government debt arises as a result of governments spending more than they collect in taxes and other revenues. And they have been doing this with a vengeance since the 1960s. If we consider governments’ spending history since 1980, the first wave of spending produced federal deficits of just shy of $16 billion during the fiscal year ended March 31, 1982, but rose steadily to $39 billion for the year ended March 31, 1993. Alarmed at the uncontrolled rise of deficit spending and debt, the PM of the day, Jean Chrétien, and his Minister of Finance, Paul Martin, decided to take back control over runaway expenses and debt. They and successors were remarkably successful by steadily reducing budget deficits, and actually produced a budget surplus for the year ended March 31, 1998, which continued for the next ten years, a remarkable achievement in terms of responsible management of the government’s financial resources. However, fiscal year 2009 witnessed the return of deficits, resulting from the Great Recession of 2008/09, and fiscal 2010 produced a record $56 billion deficit. During the next five years, deficits were steadily reduced, and a small surplus was produced for fiscal 2015. Since that time, however, federal deficits have increased steadily to $19.4 billion in fiscal 2018.

During the above period, while the federal government borrowed more money than it would ever be able to repay, some provincial governments were even more reckless. The result is that, at this time, the combined debt owed by our provinces is about the same as the debt owed by the federal government, $641 billion.

To the surprise of many, residents of Labrador and Newfoundland carry, on a per capita basis, the highest level of net provincial debt, namely $27,799. Residents of Ontario and Quebec are not far behind and owe, on a per capita basis, $21,958 and $21,660 respectively. Despite having suffered serious economic setbacks during the past three years, Alberta continues to enjoy the lowest per capita provincial net debt level, at $5,068 per person, followed closely by B.C. at $8,785 per person.

B.C., Alberta and Saskatchewan are well positioned to await a recovery of global resource markets. Saskatchewan and Alberta have demonstrated in the past that they are able and willing to cause significant reductions in their debt levels when export markets are strong.

Newfoundland is clearly finding itself in a precarious financial position, and is pinning its hopes on expansion of its offshore oil production activities. The debt challenges are probably the most serious in Ontario. High costs of delivering government services are making it virtually impossible for its Premier to deliver a balanced budget, while its largest industry, auto assembly and parts manufacturing, is under siege. Ontario also suffers from high energy costs, curtailing its industrial ambitions. Furthermore, one has to think that the acrimonious NAFTA negotiations of the past year, coupled with a new USMCA Agreement that is skewed somewhat in favour of the U.S. and Mexico, will not make Ontario a more inviting location for foreign investors. Similar comments can reasonably be voiced for Quebec. On the plus side for Quebec, its industrial base benefits from virtually unlimited availability of electric power which also happens to be the lowest cost of anywhere on the continent.

New Brunswick is battling significant demographic and economic problems, resulting from a shrinking population that is gradually aging, and a shrinking industrial base.

The above strongly suggests that while some provinces may be beset by problems that are likely to be temporary in nature, a significant number of provinces have more fundamental problems that policymakers will find difficult to tackle, given their excessively high cost structure and overextended debt levels.

In addition to federal and provincial debt, taxpayers are on the hook for municipal debt. These debts can be considerable, as in the case of Toronto ($3.5 billion) or Montreal ($5.5 billion). On a per capita basis, these debts typically range between $1,500 and $2,500, although some fall outside of this range. Montreal is high on the list ($2,947), but not quite as high as Edmundston, N.B. which, at $5,096, ranks the highest. Lowest is Sault Ste. Marie (ON) at just $120.

There’s actually more to the story: there are literally hundreds of corporations that are owned by the federal government (and provincial governments) and all of their debts are the obligation of the federal (or provincial) government, i.e. taxpayers. While we are well familiar with the eighteen federal Port Authorities, much larger entities include Canada Mortgage and Housing Corp (CMHC, Canada’s government-owned residential mortgage default insurance company), Canada Post Corp., Export Development Corp (EDC), Business Development Bank of Canada (BDC), and many others. EDC has debts of about $50 billion, while BDC has debts of about $21 billion. While it is extremely unlikely that even a small portion of those obligations should become the responsibility of the taxpayers, what about CMHC which has debts totaling about $235 billion? It is not inconceivable that the housing market could at some point take a serious “hit” that would overwhelm the financial resources of CMHC. After all, CMHC insures the most risky segment of the residential housing market.

Statistics Canada reported on December 14 that an average Canadian household owed $1.77 in debt for every one dollar in income it earned. By way of comparison, an average U.S. household owed $1.35 in debt in 2007, just before the Great Recession, for every one dollar in income it earned. Based on those simple statistics, we might conclude that average Canadians are at greater risk of financial calamity than average Americans were in 2007. During the Great Recession, 9.3 million American households lost their homes through foreclosure, surrender or distress sales, and the Wall Street Journal in 2015 projected that less than a third of those who lost their homes would ever become homeowners again.

Public debt is a destructive addiction that politicians just cannot fail to stoke. While borrowing may well be justified to “ease the pain” when things are difficult, governments typically fail to repay the borrowed funds when things get better. Politicians promise to bestow the electorate with goodies once they are elected, but the electorate is apparently oblivious to the fact that the goodies are financed through borrowed money, which taxpayers are obliged to pay back. In an editorial on “millennial socialism”, The Economist of February 16 commented that “Even if governments have recently been able to borrow more than many policymakers expected, the notion that unlimited borrowing does not eventually catch up with an economy is a form of quackery.”

Compared to other nations, Canada is financially in good shape. But that should not fool us. As we have seen above, some of our provinces are already facing serious challenges making ends meet, let alone reduce outstanding debt. As we know from personal experience, and as we can see from the above, excessive debt is like a noose around our necks, preventing us from doing the things we should do to enjoy a better future, and it represents a serious burden to our children. Debt represents an obligation to set aside a portion of our future income to repay principal, and the interest accruing on the debt.

The world changes constantly, and we must be prepared to change with it. We must remain flexible to respond to changing circumstances, which is impossible once we have boxed ourselves in with excessive financial obligations. Our current social programs were designed in an era of high economic growth that we thought was going to last forever. But it didn’t. The future turned out to be less bright than we thought in the 1960s. In addition, our international competitiveness has eroded, our labour productivity has lagged for decades, and our population is growing older, requiring increased spending on pensions and healthcare. Meanwhile, the cost of delivering government services has exploded, and politicians have no idea how they are going to run the country on a finally self-sustaining basis.

We are at a crossroads. We are like hippies in High School thinking about living on a farm, enjoying a life of psychedelic delights, love and sex, instead of attending boring school, listening to boring parents, and “looking forward” to a boring job somewhere in a boring office. Yes, the seduction of an exciting life is strong, but do we really want to bet “the farm” on a future of no education, and no job experience? Yes, we can try the seduction for maybe a year or two, but if we then choose to continue with it, there will be no turning back – it will be too late.

And so it is with debt. It ties us down, it removes our ability to make future choices. Our level of indebtedness decides how we’re going to spend a portion of our future incomes. Once we acquire too much debt, it will be the noose around our necks that will determine serious limits to the risks we can assume, and the money we’ll have to enjoy ourselves and pursue opportunities. It can ruin our lives, and it can make us homeless, as many in the U.S. experienced. From a national perspective, excessive debt will prevent our governments to deal with adversity, and will prevent us from doing what needs to be done to re-build competitiveness. Needless to say, ultimately our healthcare, pensions and other social programs will be at risk. Never mind allowing politicians to compare Canada with other countries in terms of debt-to-GDP ratios, or other nonsense to suggest that we are in far better shape than other countries. Politicians use these comparisons to justify borrowing even more money.

Lastly, we must ask what the root cause of our budgetary deficits is. Clearly, governments feel they can no longer raise taxes, for fear of creating a taxpayers’ revolt. Instead of asking taxpayers to pay higher taxes to enable the added expenditures, politicians simply borrow the funds to enable the expenditures, and chalk the debt up as a responsibility and obligation of the taxpayers, without their approval. Imagine that, at a corporate level, the CEO would deliberately spend more than the Board-approved budget, and saddle the balance sheet with unauthorized debt. Such a CEO would not last long, but in government, there is little accountability because voters are busy making a living, rather than following what the party in office is up to. Besides, governments borrowing excessively and without accountability has gone on for so long that is has practically become a privilege for the party in power to go on a spending spree.

We should insist that our governments live within their means or, better yet, produce budget surpluses to enable debt repayments, which will ultimately make it possible for taxpayers to receive services at lower cost. Given that Canada faces serious economic and competitive challenges, we should insist that governments prioritize spending to improve productivity and competitiveness, and reduce spending on other, lower priority items. We should question whether programs that were designed decades ago are still relevant today, and we should insist that social programs be funded in a sustainable manner to reflect the expectation that these programs will cost more in the future, and that there will be fewer taxpayers to pay for them. We should ask why governments carry out activities that could be outsourced or sold to private enterprises to lower the cost of delivering the services. In other words, we should insist that governments think like businesses, eliminate unnecessary activities, and reduce the cost of necessary activities. Achieving such efficiencies will go a long way toward responsible government financial management, and should ultimately result in the elimination of budget deficits and debt reduction.

We should ask why successive federal governments have deliberately allowed CMHC to remain undercapitalized, thus creating a financial risk to taxpayers. CMHC should charge more for its insurance services, so that its business risk is ultimately properly carried by the clients it services, not taxpayers. In addition, raising its rates would level the playing field with privately-owned Genworth MI Canada Inc., which competes for the same customers.

In addition to insisting on outsourcing and business simplification, we should also insist that governments dispose of the numerous corporations they own. Some, if they no longer serve a useful purpose, should be wound up. Others, if their activities are not in pursuit of some essential government policy, should be privatized. History has taught us that privatized Crown corporations do much better after they have been released from the less-than-optimum processes and procedures that are inherent in government operations. For example, privatization (along with “finding” Hunter Harrison) allowed CN to be turned into North America’s most efficient railway, after a lengthy history of being almost irrelevant. Other names associated with transformations from bureaucracy to first class business performance include Petro Canada, Potash Corp, Alberta Energy and Cameco.

The citizens of Ontario are now discovering that past reckless behaviour of their provincial governments has compromised the province’s future. Ontario finally has a Premier who is willing to tackle the problem head on, but his will be a thankless task as he will create a lot of seriously disgruntled citizens who thought the gravy train would never end. However, tackling the deficit and the debt can no longer be delayed, if the province is to have a future. We should all take Ontario’s example to heart, and restrain our provincial and federal governments from getting in over their heads. Our children will thank us for it.

(With files from RBC Economics Research)