Deadbeat nation

Failure to rein in spending and make tough budget choices puts the provinces on course for a European-style debt crisis

by Tamsin McMahon

The deadbeat Bunch

Nati Harnik/AP

Alison Redford made a show last year of demanding an apology from Ontario’s Dalton McGuinty for suggesting his province’s economic struggles and exploding deficit were the result of a petrodollar benefitting Western Canada. McGuinty retracted the comment, but eight months later announced his resignation amid a fractious minority parliament, a provincial credit downgrade and a war with teachers over freezing salaries to plug a potential $16-billion budget hole.

McGuinty may have been pilloried in the West for blaming Ontario’s woes on high oil prices, but in a televised address last month the Alberta premier was also pointing fingers, blaming her province’s projected $6-billion deficit on a “bitumen bubble” that was depressing Canadian oil relative to world oil prices.

Her answer to the problem wasn’t that the province should raise taxes or cut infrastructure spending, but that it would convene a summit of experts and “everyday Albertans” to come up with solutions to Alberta’s ballooning deficit. That was hardly reassuring to her critics. “If Alberta cannot balance its budget with a 4.5 per cent unemployment rate and $85 per barrel of oil, no province can,” fumed Wildrose MLA Rob Anderson.

Redford and McGuinty come from a long provincial tradition of blaming external factors for their chronic budget deficits, while continuing to overspend. It’s a habit that exposes one of the most overlooked crises in Canadian finances: Even as Canada is held up as a model of fiscal responsibility around the world for our relatively low federal debt, our provinces are swimming in red ink.

With $660 billion in federal debt, Canada’s national debt-to-GDP ratio looks reasonable at 36 per cent, compared to, say, America’s 72 per cent. But add in the estimated $589 billion in provincial debt and we’re suddenly at around 86 per cent, putting us close to the 90 per cent debt burden analysts say begins to harm economic growth. Factor in other debts, such as pension liabilities and the debts of Crown corporations, and Canada’s debt suddenly rises to 104 per cent of GDP, according to the International Monetary Fund. (By comparison, Italy stands at 126 per cent.)

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“One reason we have a strong currency is because we have our fiscal situation under control,” says Philip Cross of the Macdonald-Laurier Institute, an Ottawa think tank. “But people are talking about the federal government. If people added in the provincial governments it’s not as bright a story.”

That’s something of an understatement. Provincial governments are hurtling toward financial disaster at breakneck speed. It’s the provinces that shoulder most of the burden of an aging population, with rising health care costs and massive demands for infrastructure spending. Couple that with public sector compensation demands and a political refusal to make tough spending decisions, and provincial budgets could quickly spiral into a crisis that engulfs Ottawa and risks the country’s reputation as a fiscal stalwart—and, ultimately, destabilizes the economy.

Provinces have suffered a slew of grim financial news recently. In December, ratings agency Moody’s put B.C. on notice for a downgrade of its $40-billion debt because of rising deficits and lower royalties for coal and natural gas. Ontario saw its bonds downgraded last spring after its debt skyrocketed 70 per cent since 2008. Half the provinces, including Ontario and Quebec, have debt-to-GDP ratio as big or bigger than the federal ratio of 33 per cent.

Last fall, the Macdonald-Laurier Institute found that Ontario’s debt was worse than that of California—a state with such troubled finances that it once was forced to issue IOUs instead of income tax refunds. The Fraser Institute is even less kind to Canada’s largest province, pointing out in a new study that the relative size of its debt load is exactly where Greece was in the 1980s, and warning that the basket case of Europe could be “ a cautionary tale” to all Canadian provinces.

Ontario is hardly alone. Across the board, provincial governments have spent in excess of their budget forecasts, with resource-dependent western provinces the worst offenders. CIBC World Markets chief economist Avery Shenfeld noted last week that nine of the 10 provinces expect to miss their budget targets this year thanks to slower economic growth.

It’s a long-standing problem. Combined, federal and provincial government spending has exceeded budget targets by $82 billion over the past decade, according to a report from C.D. Howe Institute, with the provinces accounting for the majority of the overrun. It called the provincial tendency to blow budgets a problem that was “too common to be accidental.”

While Bank of Canada Governor Mark Carney has chided Canadian households for racking up the debt, Douglas Porter, the chief economist at BMO Capital Markets, argues households have been relatively prudent spenders compared to provincial governments. “Policymakers have been pretty quick to point to the buildup of household debt and to some extent they’ve done a good job of shifting the focus away from government debt,” he says. “But some of the provinces are in as difficult shape as they’ve ever been and they should be back on the radar.”

Part of the problem is a tendency, almost compulsion, for provinces to issue overly sunny revenue projections. In Alberta, Redford ran on an election campaign last year that assumed oil prices of $100 per barrel, even though prices realized by Alberta producers are tracking closer to half that. (Not only have petroleum prices fallen, but a discount is applied to oil sands crude because of the difficulty in getting it to American refineries.)

In November, Saskatchewan slashed its forecasted surplus from $95 million to $12.5 million because of lower revenue from potash mining royalties. Still, the province only dropped its predicted price for the fertilizer from $477 per ton to $440—even as a Reuters poll of North American analysts foresaw prices falling to $417 this year.

All the positive talk from Ottawa and elsewhere about Canada’s strong finances and resource-based economy will only make it more difficult to convince Canadians they need to accept the tough sacrifices needed to repair provincial balance sheets.

For instance, Ontario refused to implement most of the key recommendations from Don Drummond, the former TD Bank chief economist hired to find solutions to the province’s deficit crisis. Drummond offered 362 different ways Ontario could fix its finances, including scrapping all-day kindergarten, capping health care funding and closing casinos. Critics have called on B.C. to raise income taxes and corporate taxes, which the province likes to boast are among the lowest in the G7.

Likewise, in Alberta a growing chorus has urged the government to boost corporate taxes and royalty fees and scrap its flat-rate 10 per cent personal income tax for a progressive tax system. Jack Mintz, the influential University of Calgary tax expert, has called on the province to implement a sales tax to mend its finances. Most importantly, all provinces must get tough when it comes to reforming public sector wages and benefits, says Dana Peterson, an economist at Citi Global Economics. She’s mapped out the wages and hours worked in every sector of the Canadian economy and found teachers and public sector employees clock the fewest hours and have the priciest hourly wages. “It’s not that the problem can’t be dealt with. But it’s going to mean sacrifice,” Peterson says. “It’s going to mean that people are going to have to really start to contribute to their retirement and potentially to their medicare costs.”

Tax hikes, spending cuts, union concessions—all of that is easier said than done. Ontario teachers staged one-day strikes to protest the government’s plan to scrap wage hikes in the their contract. Last year Quebec faced violent months-long protests from students when it tried to increase university tuition by a modest $325 a year over five years. Boiling down the issue for Albertans, Redford recently warned residents that for new hospitals, highways and hockey arenas to be built, the province will have to dip into the red. “If everything we do right now is funded fully with cash in the bank,” she told reporters, “then we are never going to build anything more in this province.”

Line up Canada’s provinces side by side with American states and we start to look like the poor cousins. The ratio of state debts to GDP range from close to 2 per cent in Tennessee to 20 per cent in Massachusetts. California’s debt amounts to just 7.7 per cent of GDP. In contrast, no province east of Manitoba has a debt ratio lower than 25 per cent, with debt equal to just shy of 50 per cent of Quebec’s economic output and some 38 per cent in Ontario. “There’s no state on the level of Ontario and Quebec,” says Marc Joffe, a consultant and former senior director at Moody’s Analytics. “Not even close.”

In the report he authored for the Macdonald-Laurier Institute last fall, Joffe calculated that nearly every Canadian province faces a 50-per-cent chance of defaulting on its debts within 30 years. Ontario, with its huge and persistent deficits, is the most likely to default within the next 10 to 20 years. But the real surprise is Alberta, which Joffe estimates has an 84 per cent chance of defaulting, assuming interest rates rise to historic norms and the province maintains its current unsustainable deficit trajectories.

It’s an unexpected prospect given that Alberta doesn’t actually have any debt right now. But Joffe says it reveals just how dependent the province is on volatile oil revenues. Alberta also has a rapidly aging population and a deficit that has been rising despite commodity prices that remain above their long-term averages.

A default has happened before. Alberta is the only province in Canadian history to renege on its debts. The province suffered a major financial crisis during the Great Depression and eventually defaulted on $62 million in bonds before it was bailed out by the federal government. Much has changed since then, of course, with the discovery of oil. But it raises an important question: How likely would the federal government be to come to the rescue of provinces if they find their debts unsustainable? Very likely, if history and the expectations of debt investors are any indication.

Nearly half of Canadian provinces had to be bailed out in the 1930s. Ottawa has since introduced transfer and equalization payments to the provinces, but that hasn’t kept their finances stable, nor does it mean the federal government won’t feel obliged to bail them out.

Joffe believes the Canadian government set a lasting precedent with its past provincial bailout, instead of letting them learn from their excesses. “Maybe that would’ve been a teaching movement and we would have had long-term fiscal restraint,” he says. “But we didn’t get that. Instead, we got a high-risk situation.”

Even as recently as 1993, Saskatchewan openly mused about defaulting after its credit rating was slashed to near junk-bond status. In a series of internal memos that were eventually made public, the federal government of the time quietly worried that it would have to come to the rescue of both Saskatchewan and Newfoundland, whose credit ratings were then on par with Colombia and El Salvador.

Even today, ratings agencies give provincial governments better credit ratings than U.S. states, despite the fact that provinces face larger per capita debts and interest payments. Joffe says credit rating agencies have factored in an 88 per cent probability that when provinces finally hit the wall, Ottawa will come to the rescue.

Despite this, federal transfer payments to the provinces, which were roughly $62 billion last year, come with virtually no strings attached and aren’t contingent on how well those governments manage their finances. Prime Minister Stephen Harper has signalled that his government is unlikely to change that when the current federal-provincial agreement expires in 2014, telling reporters last year that he didn’t “anticipate major changes to the program.”

But if the federal government is indeed expected to bail out deadbeat provinces, that needs to change, argues Glen Hodgson of the Conference Board of Canada. “There should be a heavy political price to pay” he wrote in a blog post, with the feds making money contingent on deep cuts to provincial spending and federal approval of future provincial budgets. Such a scenario is not all that different from Germany demanding Greece balance its books in return for rescue funds.

A provincial default will likely never happen. But Canadians would be wise to keep the past in mind before they start thumping their chests about Canada’s strong federal finances, since today’s provincial budget problems could easily become tomorrow’s national debt crisis.

It’s difficult to lay the blame entirely on provincial governments for their budget problems. Provinces face fluctuating and uncertain revenues compared to the steady stream of income tax and GST that flows to the federal government. For instance, a $1 drop in oil prices translates into a $223 million plunge in provincial revenues for Alberta. Similarly, natural gas royalties were Alberta’s largest source of resource revenues for most of the last decade. But with stubbornly low prices, gas revenues have fallen from $8 billion a year in 2006 to little more than $1 billion.

Unlike American states, provinces are also responsible for health care—the single largest cost to governments—and have faced expenses that have risen much faster than the federal transfer payments used to pay for them. In Ontario, half of provincial spending goes just to pay for health care, a figure that could hit 80 per cent within a few years.

What’s more, as Ottawa makes changes to balance its books, the burden of rising health care costs will increasingly fall to the provinces, according to a report last year from Parliamentary Budget Officer Kevin Page. With the feds planning to link increases in health transfers to economic growth beyond 2017, Page’s office predicts that health care costs will quickly begin to outstrip the federal funds used to help pay for them. But with a rapidly aging population, curbing rising health care costs is no easy task. Provinces will continue to face a host of demands on their budgets. Highways must be repaired. Hospitals need to be built. And a greying workforce means provinces will have less tax revenue to pay for it. Solving the problem will take more than issuing bonds or cutting teacher’s salaries for a few years. These measures just kick the can down the road, which is precisely what countries like the U.S. and Greece did—until their debts reached crisis proportions.

“The old band-aid of ‘let’s freeze spending for a couple of years’ isn’t going to solve this problem,” says Cross. “We are going to have to start taking this seriously or there are going to be some Greek-like consequences.”

What, us worry?

While their ledgers drip with red ink, provincial leaders are holding to the age-old tradition of continuing to overspend while blaming external factors for their chronic budget deficits

BRITISH COLUMBIA

Consistently blows its budget: total spending overruns from 2000 to 2010 were $6.1 billion or 15% of its 2011 budget Deficit expected for fiscal 2012-13: $1.47 billion Debt downgraded from stable to negative by Moody’s in December

Chance of default within 30 years: 53.6%

ALBERTA

Consistently blows its budget: total spending overruns from 2000 to 2010 were $10.4 billion or 25% of its 2011 budget Faces $6 billion budget shortfall

Chance of defaulting on debt within 30 years: 84%

SASKATCHEWAN

Consistently blows its budget: total spending overruns from 2000 to 2010 were $3 billion or 30% of its 2011 budget

Chance of default within 30 years: 47.8%*

ONTARIO

Deficit for fiscal 2012-13: $11.9 billion Provincial debt rating downgraded last year Net debt per capita: $18,889 Debt-to-GDP ratio: 37.7% Net debt: $255 billion

Chance of default within 30 years: 79.3%

MANITOBA

Deficit for fiscal 2012-13: $567 million Net debt per capita: $12,734 Debt-to-GDP ratio: 27.1%

Chance of default: 66.7%

QUEBEC

Consistently blows its budget: total spending overruns from 2000 to 2010 were $10.4 billion or more than 15% of its 2011 budge Net debt per capita: $22,001

Debt-to-GDP ratio: 49.6%, highest in the country

NEW BRUNSWICK

Deficit for fiscal 2012-13: $411 million Net debt per capita: $14,553 Debt-to-GDP ratio: 33.1%

Chance of default within 30 years: 52.9%

PRINCE EDWARD ISLAND

Consistently blows its budget: total spending overruns from 2000 to 2010 were $300 million or 20% of its 2011 budget. Debt-to-GDP ratio: 34.6% Net debt: $1.8 billion

Chance of default within 30 years: 57.1%

NOVA SCOTIA

Deficit for fiscal 2012-13: $277 million Net debt per capita: $14,463 Debt-to-GDP ratio: 34.8%

Chance of default within 30 years: 53.6%

NEWFOUNDLAND

Deficit for fiscal 2012-13: $726 million Net debt per capita: $17,360 Debt-to-GDP ratio: 26.4%

Chance of default within 30 years: 50.2%




Browse

Deadbeat nation

  1. It would like to point out something missing in this article: there is no “Chance of default” percentage for the province of Quebec. You know why? Because this is the the lowest of the country and by FAR: Quebec have a 28 % probability of default, Anyway, ROC media don’t talk about the goods in Quebec. Instand, they prefer to insist on the bads: Quebec have the highest Dept-to-GDB of the country (49%) Ok, but is it to much to give the full picture? Yes, because than they would understand Quebec CAN afford to be an independant counrty.

    • This comment was deleted.

      • I did vote, thanks. And the PQ is in, now. Other advises (or insults) you want to share?

      • “You leave with what you came in” haha, this is a good one. WE (QUEBEC) PAID OFF THE ENTIRE DEPT OF THE UPPER CANADA (ONTARIO) WHEN UPPER AND LOWER CANADA MERGE TOGETHER. Open a history book, for christ sake.

      • Can we “leave” with the name? CANADA was ours to beging with!

        • I think we should return to those days….the original Canada….upper and lower.

          Ontario and Quebec think in a similar way, have the same kind of economy, and generally see the world the same way.

          The other 8 provinces are primary resource economies…..so they think and act differently than we do.

    • They get 14 billion in welfare payments from the rest of Canada to bribe them to stay. Their own country… Yeah and we will pull out all the federal buildings that we put there to appease them too.

    • They posted the bad statistics about every province, that was the whole point of the article. For each province they selected the worst statistics. You’re paranoid.

  2. Ontario can deal with its own problem if it does not need to subsidize the federation. Ontario deserves a 10-year break …during that time, all tax revenues (HST, corporate and income taxes etc) collected in Ontario goes to the province. It is time that Ontario stop being the big brother of the federation. If this calls for a breakup of Canada, let it happen. The whole federation thingy needs a substantial reshape. Provinces will keep all its revenues and then decide how much to transfer to Ottawa, based on their ability to pay. Those smaller provinces that can’t make it will have to decide whether to merge with larger provinces or join the US or find other means of making it.

    • And no transfer payments from the Western Provinces. You guys would go in the hole faster than you can say Dalton McGuinty

      • Ontario is 40% of Canada’s GDP. Alberta is 16%. So shut it.

        • And Ontario is an equalization recipient. BC, AB, and SK are not. We Ontarians are now siphoning from lowly Saskatchewan’s commodities boom and crying for a lower dollar to boot. The time for Ontario to complain was when SK was a basket case and Ontario was subsidizing them. For whatever reason, Ontarians didn’t seem to mind, arguing that they were just being good Canadians by rewarding economic stagnation in other provinces. Now we’re discovering that a huge province trying to score equalization from provinces 1/12 our size just doesn’t work as well as when money was flowing the other way. What a shock that is.

          • Ont gets a small rebate on a massive multibillion dollar contribution for the first time in 150 years. We’re not whining, why are you?

            And all the provinces are broke, RR

    • Oh gawd…I agree with that!

      I’m sick of subsiding the other provinces and getting nothing but lip in return.

      I think Quebec and Ontario should go back to being the original Canada, and say hosta la vista to the other 8 deadbeat provinces that are on a different economic system

      • Yet you’re willing to keep subsidizing Quebec? No lip there.

        • Ont and Que have always gotten along. We started out together after all. We’re not the ones who fuss about French on our cereal boxes.

          Que is very wealthy in hydro-electric power, and has shale gas, mining and so on in resources…..but has an industrial and post-industrial economy otherwise. They don’t need subsidizing. It’s this old Fr/Eng crap in the way.

    • Ontario should have made that argument – forcefully – 3 decades ago. Instead Ontarians tended to look down their noses when Alberta made precisely the same argument. Until recently, most Ontarians would argue that they were “proud to help the poorer regions out”. Now Ontario is an equalization recipient, except the cupboard is bare and whatever help we get from that program won’t amount to more than peanuts. However, I find it encouraging that we have finally awoken to the fact that equalization has always been a sucker’s game.

      • Ont has been trying to dump equalization for years.

        Ont btw only gets a rebate on our multi billion contribution to it.

        Alberta didn’t think it was a sucker’s game when they got help…..it only becomes that when they have to help others apparently.

  3. The reason why many developed countries are struggling with debt is because of 30 years of failed free-market reforms that culminated in a global economic meltdown we have yet to recover from.

    In the post-war Keynesian era we paid our bills. Canada paid down most of its debt from 100% to 17%; America from 135% to 35%. After 3 decades of right-wing ideology Canada now has 85%, the US 103%.

    One of the causes of high debt is reckless tax cuts free-market ideologues said would “pay for themselves.” Of the 6 developed countries with over 100% debt, 5 of them are low tax countries:

    Japan: #4 with 230%; Greece #8 with 161%; Portugal #10 with 107%; Ireland #5 with 105%; US #1 with 103%.

    Many northern European countries that stuck with the mixed-market system have less than 50% debt.

    The other reason there are debt problems is anemic GDP growth caused by free-market reforms which downsized living standards for most people. Since debt is measured in debt/GDP, low GDP growth and recession make debt more burdensome.

    • You know, you’d probably save a lot of time and trouble for folks if you just put that screed up on a website somewhere and posted a link to it every time instead.

      • I am simply stating economic facts. Believe it or not, many people happen to be interested in them…

        • No, you’re not stating them. You’re re-stating them. Over and over and over ad nauseum. The phrase one trick pony comes to mind, and that’s only because I’m feeling generous and don’t want to accuse you of beating animals… even dead ones.

          • These facts about government debt are very important, as well as the brief history of economics. People need to know how we got here, especially when right-wing ideologues who caused all the mess are spreading lies about what really happened. If you are not interested in the facts, then simply don’t read them.

          • On the contrary its not a dead horse and to get through to a brainwashed populace one must instill the Ideals of truth over authority…not authority over truth. so you have a choice don’t read it !!!

    • Part of the problem is centrally-planned banks.

      They create money, and thus inflation, out of thin air.

      The other problem is demographics. It was easy for the developed world to pay off its debts when 1/3 of an entire country was comprised of people under the age of 25, who had their whole revenue-generating lives ahead of them. With a birth dearth, and the increase in liabilities that aging social-democratic states bring, it’s only natural we wouldn’t be able to pay our bills.

      • Actually, the central banks have been controlling inflation over the past 30 years, not creating it. Most money is created by private banks through the process of loaning money. This money not created out of thin air because it’s tied to real-world assets (like houses) which banks are on the hook for if there is a default (that is, with proper banking regulations in place.)

        The reason why government debt has gotten out of control is because of continuous tax cuts over the past 25 to 30 years. Obviously if a government cuts taxes it reduces its revenues which creates deficits. That is why we were able to pay our bills in the post-war era, but are struggling now after all the failed tax cut schemes.

        Countries like Norway, Denmark and Sweden have low government debt because they didn’t get suckered into the neo-con Ponzi scheme that says tax cuts “pay for themselves.”

        • Famous Georg H. Bush quote. “Read my lips, No new taxes.” Just before his ill conceived, vote pandering economic policy started the balling rolling.

          • Bush broke that promise almost as soon as he spoke it, but don’t let little facts like that ruin a good riff. The debt problem goes back much further than the 1990s. Government deficits suddenly became structural in the very early 1970s. These problems don’t appear overnight as the result of one leader or one presidential term.

          • Bush Sr. was reversing Reagan’s reckless tax cuts that failed to “pay for themselves.” The soaring government debt over the past 30 years in countries like Canada and the US was largely caused by continuous tax cuts and debt-servicing costs from inflation-fighting monetary policy. Many northern European countries have low government debt because they didn’t abandon progressive taxation.

    • One could also argue the opposite – that debt only exploded after Breton Woods fell apart in 1971, and that the pseaudo-gold standard the world had been on since WWII was what prevented governments from printing too much debt. In other words, the very Keynesian idea of abandoning the “barbarous relic” is what created the debt implosion we’re seeing now. But I suspect that’s an economic “fact” you’re more inclined to gloss over. As Thwim has rightly pointed out, you’re more interested in mindlessly repeating the same argument than in engaging in an actual discussion with someone.

      • Clearly you don’t understand how a discussion works. Someone states something. Someone else challenges what was stated. I made my comment which *started* this discussion. So let’s dispense with the nonsense and just discuss the issue at hand.

        Your point that the gold standard prevented governments from printing debt doesn’t mesh with the facts. During the post-war era (1945-1975,) governments employed the Keynesian system which used fiscal and monetary policy as a counterweight to the business cycle. This produced small deficits during recessions and small surpluses during recoveries. The reason governments didn’t “print debt” is because they didn’t *need* to borrow money. With very strong GDP growth, debt was paid down as the economy grew.

        Second, governments today are not “printing debt.” Ones that have deficits are *borrowing* money and paying interest on the debt. The interest payments come from tax revenues. If a government needs to borrow money it issues bonds.

        No doubt, it is possible for a government to print money and buy back debt. But that is not what is going on today. Quantitative Easy is completely unrelated to government debt. It is expansionary monetary policy that’s attempting to stimulate the economy. What most people don’t understand about QE is that it only affects “state money” which comprises 15% of the total money supply (M3). The US money supply is actually shrinking below trend:

        FP: Money. Where’s the money?
        http://opinion.financialpost.com/2012/08/03/money-wheres-the-money/

        • Not to worry Ron. When people such as Thimsical and the Rager attempt to shoot down a reasoned and well structured argument, they usually resort to using #2 bucksot. It’s called the shotgun effect.

          • It wasn’t a reasoned and well-structured argument, it was a narrative of cherry-picked facts, along with some false conclusions where he assumes correlation = causation (i.e., we practiced Keynesian economics for 35 years, and the economy grew, thus Keynesianism caused the economy to grow). One can only have a “reasoned and well-structured argument” when one is willing to question one’s own assumptions and hold them up to the light. Which is why I proposed an alternative explanation as a question.

            There is much about macroeconomics that we simply don’t know for sure. There’s plenty of debate about why the economy grew so steadily after WWII. We do know that demographics, monetary policy, Breton Woods, the Marshall Plan, pent up consumer demand after decades of war and depression, and numerous other factors were involved. And nobody, not even Ron Waller, can be precisely certain why all these factors (many of them unique to that era and unrepeatable) created such a successful economic outcome. And it is anything but clear how, or even if, we can go about recreating that kind of steady growth. Endlessly repeating that we just need to go back and do what we did then isn’t reasoned at all. Stating this with absolute certainty, as though it were unquestionable truth, is the very opposite of reason.

          • In the real world, people judge things by results they get. The reality is that free-market ideology crashed and burned in two global economic meltdowns while centrist Keynesian policies created modern living standards which were unprecedented in human history.

            All free-market ideologues can come up with is excuses: it wasn’t Keynesian economics that were successful it was some unknown factor; it wasn’t free-market ideology that wreaked economic havoc destroying living standards: it was something unknown.

            But it’s easily explainable why free-market reforms failed over the past 30 years. It’s because they were entirely self-serving to businessmen. Free-marketers promised rising living standards, economic prosperity but what did we get? An economic tide that only raised the yachts. Living standards were downsized for everyone else.

            So the reason centrist economic policies worked? Is because they struck the right balance between was is good for workers and what is good for businesses. If policies favor one over the other (socialism or free-market libertarianism) the inevitable result is an unstable and unsustainable economy.

          • You mean the sotgun effect.

        • “Quantitative Easy”.

          Lol, I think I went to high school with her.

    • So go live in Somalia….your kind of philosophy there

  4. I think our Prime Minister should build a national oil pipeline back east starting right now, as a case of national security. Every province will benefit from this. Otherwise our provincial and national debts will grow considerably. We cannot wait on the U.S. as they are producing much more oil and gas now, which will only increase……..

    • I think a west-east pipeline is a good idea that would likely lead to cheaper gasoline prices. Due to a lack of refinery capacity, Canadians in eastern Canada are definitely getting hosed.

      I don’t think this will slow the growth of debt, however. The best way to do that is to reverse some of the reckless tax cuts which created it in the first place. Corporate tax cuts are not “creating jobs.” Tax cuts for the rich are not trickling down to the little people.

      In the post-war era, when we had progressive taxation, we spent more on social programs and actually paid down government debt (from 100% to 17% between 1945 and 1973.)

      • What else did we have between 1945 and 1971? Think real hard. (That means “really” hard.) We had a pseudo-gold standard that prevented governments from printing unlimited amounts of debt. You think that might have had something to do with the debt paydown of the era?

        • As I stated in another post, governments didn’t *need* to borrow money during the post-war era. They didn’t run big deficits. In fact government debt was continuously paid down during this time. So the gold standard did not impose any constraints on government debt.

          The reason why the Bretton Woods gold standard failed is the same reason the gold standard always fails: the economy grows at an exponential rate, while the arbitrary gold supply does not. This means the money supply is unable to keep pace with the economy. There is a strong relationship between the money supply and the state of the economy. That is why it has to be controlled by central banks. (Granted the process is far from a science. But it is the best of all worse alternatives.)

          • The strength of any currency standard is based on what someone else is willing to do in exchange for it. Any other definition is just flycrap.

          • Yes I agree the sole purpose of money is to represent the value of goods and services. So price stability is the only issue.

            I don’t think a free market place determines the right value of wages, however. People have to work to put food on the table, so they are not in a good bargaining position to get a fair wage. That’s why centrist government involvement in the economy is needed to level the playing field.

            The reality is that when workers are exploited, oppressed and cheated out of their rightful wages, it is no different than the government taking most of their wages in taxes. This kills off a tremendous amount of GDP and human potential. It also destroys markets from which rich people make their money and create jobs.

          • I agree with your second post entirely. I was not necessarily advocating a return to the gold standard. But let’s remember that Keynsesian polices continued throughout the 70s, and by then it was clear that A) Government debt was suddenly on an upward trajectory, B) Keynsesians suddenly had no answer to inflation, and C) the Keynesian assumption that inflation and recession were polar opposites was not valid, as was proved by stagflation.

            The economy of 1945 to 1970 certainly benefited from expanded government, a classic Keynesian stimulus, albeit a long term one. I don’t deny that for one second, although there were numerous other unique, one-time factors at play. But that stimulating effect eventually reached its limit in the early 1970s, and debt, inflation, and stagnation were the result. We’ve been spinning our wheels on and off ever since. I do not believe the policies of the Breton Woods era, however successful they were at the time, can be replicated now.

          • The only unique one-time factors at play were centrist economics that ensured people shared in the benefits of economic and productivity growth. Before the Great Depression and after the high inflation of the 1970s, free-market ideology was prominent (the Reagan revolution was founded on destroying post-war Keynesian “big government.”)

            I think it’s wrong to interpret that Keynesian economics caused the high inflation of the 1970s (which was the result of oil-supply shocks and wage-push inflation.) The reality is that the Keynesian counter-weight is supposed to swing both ways. If an economy is in the extreme of depression, big fiscal and monetary stimulus are required. Likewise, if an economic is in the extreme of high inflation, contractionary fiscal and monetary policies are needed.

            And that’s the way things worked out. The central banks broke the back of high-inflation with contractionary monetary policy by manufacturing a massive recession in the early 1980s. Then base interest rates were raised as high as 22% (“Volcker Shock.”) One of the goals of the inflation-fighting monetary policy from that time on (which evolved into inflation targeting) was wage control. This paved the way for corporate downsizing.

            If Keynesian policies were employed in the 1970s, (contractionary monetary, as well as fiscal and regulatory policies,) the problem would’ve been nipped in the bud a lot sooner with a lot less fall out (high government debt, third-world debt crises.) Ultimately the most effective way to moderate the economy is with cooperative inflation targeting where governments and central banks align policies (spending, taxation, regulation.)

            (An example of inflation-fighting regulatory policy is the tightening of mortgage rules recently in Canada to deflate a housing bubble. In the 1970s, wage controls alone would’ve helped break the back of inflation; price controls were unneeded because prices fall as demand falls.)

  5. Why were the Debt-to-GDP ratios omitted from BC, AB and SK and the 2000-2010 spending overruns included for only some provinces? For comparison purposes it seems an odd way to present the data. Cherry picked data might make cynics suspect that it was done to protect the narrative from inconvenient numbers.

  6. Calgary is breaking ground for a 240 million dollar library and a 140 million dollar music centre. There seems to be alot of money around.

    • There is.
      There’s actually a few problems with these predictions, some of which I pointed out the last time around Maclean’s ran Mark Joffre’s research as a story.

      To start with, his predictions rely entirely on the idea that we’ll be doing exactly the same thing for the next 30 years. There’s some indications already in Alberta that this won’t be the case. Talk of a sales tax coming into play perhaps with the next budget, or if not by then, after the next election. Obviously as things get worse, it’s highly unlikely that the provinces will maintain the same strategies.

      Also, as it says in the executive summary of the report, they’re using Statscan data that shows Alberta’s population will age more rapidly than most other provinces. Quite simply, this is out-of-date data. More recent data from Statscan shows that the birth-rate in Alberta is third highest among the provinces, and Calgary in particular has had a significant increase in its birthrate.

      So. A large grain of salt is needed in believing this report.

      • Indeed, it was all doom and gloom in the early 1990s as well, but the rest of the decade was, in retrospect, a rollicking good time. However, I think demographics are a lot uglier these days, and personal debt levels are nothing short of horrific. Forget statistics (which are bad enough) the behaviour I see is just insane. People borrowing against their house.. to finance travel. Zero percent, zero down car loans… with 8 year terms (mortgages used to be shorter than that). And if we stop doing all the borrowing and spending, what will the economy look like then? Credit-fueled spending is the only thing keeping things going right now.

        At least in the early 1990s, interest rates were high, and people who carried too much debt in that weak economy were quickly bankrupt. And governments were also forced to undergo reforms or go bankrupt. Everyone else was scared to borrow too much. And isn’t that the main function of a recession? If anything good can be said about recessions of the past, it was that they generally forced bad debt out of the system, thereby allowing for a sustained recovery. The great recession of 2008 was different in that regard. The biggest firms got bailed out. Governments began to depend on central banks to purchase otherwise unsellable quantities of public debt. And the rest of us got 3% mortgages and 0% car loans. And we expect all this to work out in our favour eventually? I hope to hell I’m wrong, but I do not get a good feeling about the next decade.

  7. Meanwhile, those of us on the right who have been yelling, sometimes for years, that governments need to rein in spending and reduce debt because this is exactly what is going to happen, get little satisfaction that the intellectual flyweights who looked down their noses and openly disdained our warnings have been proven wrong.
    The solutions are simple: reduce taxes, reduce program spending, reduce the wages and benefits of all those who work in government, strip the pension plans of govt. employees, pare back equalization, and place legislative restrictions on the abilities of govts. To increase spending.
    It is literally that simple, and is a lot less painful than what will happen when govts. start to default on those debts.
    Here’s a hint- if you make a career in any level of govt. the last thing you want, it’ll be that much easier to starve the.beast. But, under no circumstance should we taxpayers be expected to ante up another penny until we’ve seen major job cuts and pay cuts across the public sector. We didn’t create the problem, and we’re not even part of the problem, so don’t expect us to pay to fix the problem before those of you who are the problem have stepped up to the plate.

    • Odd how the more we try to starve the govt beast,squeeze the teachers the post man, and the middle class, the more the corporate sector profit margins, stratospheric CEO remuneration and general fat cat !% entittlement seems to grow…one might almost think there is a correlation there.

      • Okay, I’ll pose you this question: I make enough to be in the very small group that pays 75% of all taxes. 40% comes right off the top of my cheque. How much more do you think I should pay?
        I’ll add this: At retirement, my income will be less than that of a career civil servant whose lifetime earnings were considerably less than mine, AND who set aside a smaller segment of his or her income for retirement than I have. Given that, why should I pay more taxes, when govts. can solve a significant portion of their fiscal problems by simply choosing not to offer pension plans to new hires from this day forward?
        Why do we need to offer public employees a pension plan in the first place?

        • The sweet heart pension deals are a scandal – and ultimately stupid, if you piss off the regular tp enough.
          You really think only a couple of guys like you pay 75% of the taxes you need to look around at all the other m/c tps who are helping you out. And if you actually part with all that 40% you really should change your accountant and use up a little more of your RRSP contribution room. Jeez you think guys like you were some persecuted religious minority the way you go on at times. Be grateful for what you have – I know i am.

        • Last I read, the break down was:
          - bottom 50% of taxfilers paid about 10% of total tax take
          - middle 40% of taxfilers paid about 40% of total tax take
          - top 10% of taxfilers paid about 50% of total tax take
          Which suggests that the group that pays 75% of all taxes isn’t so very small.

          • Wilcox- The scale you’re referring to is probably about as accurate as any. Without going in to an in-depth analysis, you can extrapolate that about 25% pay 75% of taxes. But…, most such charts count public sector workers as being in those income strata, which distorts a hard reality. Those people are not actually paying any taxes, in strict mathematical terms. When you factor that in, you reduce the number of people contributing to the tax pool by a considerable amount, but it is a more realistic number.
            In a city such as Red Deer, pop. 90,000, we have 1800 city employees, plus a further 3-400 working at our one hospital, plus several hundred federal workers, plus several hundred provincial employees. 15-20% of our robust local workforce is engaged in government work, and most of them are in or near the top 10%, which means that the group which actually pays most of the taxes is considerably smaller than most people actually perceive it to be.
            Payroll is 50-70% of the cost of government, which means that the quickest route to solving most of the problem is pay and benefit cuts across the board. Remember, among those who actually pay taxes, there has been little or no call for expansions of government or govt. pay and benefits for decades, so it is incumbent upon govt. to look inward at solving their fiscal problems.

          • Hmmm, OK…..

            Are you sure that most of the hospital workers are in or near the top 10% of all wage earners group? Seems to me that for every doctor there are quite a few orderlies and cleaning staff and so on, and I would be mildly surprised to learn that any of them are in that income group. Obviously doctors are in that group. Nurses? Some are in, but most or all of them? Perhaps…Also, I’m unsure that it is actually necessary or proper to exclude taxes paid by publicly paid employees from the calculations to come up with a true “state of affairs” wrt who pays what portion of all income taxes, but I am continuing to mull that over.

            Setting aside those quibbles, how would it all look if we eliminated government involvement (I suppose we could leave the setting of standards to government – that might make some sense)? Let’s take education as an example. I’m going to assume that there would still be a demand of some sort for education, so there would still be schools, teachers and so on – a reasonable facsimile of the current system. How would that be paid for? Would attendance remain essentially unchanged? Presumably a private system would be able to force teachers salaries and benefits downwards, but by how much? Class sizes?

            And don’t get me wrong here, I’m not making the case that there is no room to do things better, or that each and every public sector salary is at exactly the “correct” value today, but I am trying to understand how much room there is to make substantive changes, so that you and other private sector top 10% (or 25%) wage earners can get your tax rate down closer to the rate that the middle 50% are paying.

            Thanks.

          • It’s not necessarily about lowering taxes, it’s about trimming back either the size of government, or the cost of government at its current size.
            By forcing the cost issue on to the backs of those who choose to work in govt., we force them to make choices such as “Do I really want to work here when I can make more money in the private sector?” Once you’ve accomplished that, then you force the legislators to do what they’re sworn to do, which is make hard choices.
            This has two positive outcomes right off the bat. One is an increase in the size of the private sector workforce. Yes, I understand that there would be a transition period, but again the impact would be far less damaging to the economy than even a handful of civic defaults a few years out. This in turn would have positive ripple down in that business confidence in the workforce capacity would be improved leading to a measurable bump in small business capital purchases.
            Looking down the road, by forcing govts. instead of the private sector, to bear the brunt of the manpower crunch, you ultimately force govts. at every level to stick to the vital stuff.
            For example, all new public buildings in our city must allocate 1% of the capital cost for public art. That means that, on a $50 million facility, a half a million that could fix potholes or leaky sewers goes to “art”. Just like every other city out there, every city dept. has a “communications director”.
            Really? Again, half a dozen communications directors costs enough to fill a ton of potholes.
            The province is no better. Do we really need an intergovernmental affairs minister and the attendant 100-200 employees attached to it. Minister of Culture? You can live in a free country, or one with a culture minister, but not both.
            The point is; force the fiscal pain on to govt. and those who work there. They made the choice to work in govt., and anyone so stupid they’re unaware of fiscal problems at every level of govt needs a hard dose of Darwinian economics anyways. It is literally the only way we’ll get govt. finances in order.
            Take a bunch of their money away, and then they’ll be forced to focus on the roles of government, and only their level of government.
            Starve the feds and they’ll stay out of the provincial jurisdictions, and on down the ladder.

          • Wrt lowering taxes vs trimming costs or size: gotcha, and definitely agree that something needs to happen wrt getting gov books balanced.
            Not sure why there would be any preconditions (vis a vis encouraging people to switch from public sector work to private sector work) to forcing legislators to make those hard choices. In fact, it seems to me that getting the legislators to act is the proper first step – eg institute wage freezes and monitor as workers switch to more lucrative work over a period of time.
            Also, I’d be surprised if a lot of people get into a particular career because it happens to be government work – rather I suspect they get into a career that they enjoy (eg I always wanted to be a nurse) and the fact that it happens to be a public sector job is basically a secondary consideration.
            I’ve got no grief at all that new public buildings often have a 1 or 2% allowance for art, but if it really is the will of the people to get rid of that small subsidy, I won’t be upset.
            Wrt communications officers, agreed. I believe it was Klein in AB who took the provinces Public Affairs Bureau and expanded it from 4 people to ~200 people – crazy!
            Wrt AB’s intergovernmental affairs department, I completely agree – get rid of the entire lot.
            Wrt a Minister of Culture, I’m OK with eliminating that as well, although I honestly don’t feel “unfree” in any way due to the activities of that department.
            Now, to tie this back to one of my questions, above, assume that we freeze teachers salaries for, lets say, ten years. At the end of that time it would be reasonable to assume that at least a few teachers have found other employment, possibly at a private school, possibly in a completely new profession. The teachers that have switched to private schools, are they now providing a service that is fundamentally more valuable than when they were working in the public sector?

          • Yes, there are some careers, such as nursing or teaching, that are essentially public sector. But, we need to be more assertive as to the financial limitations of those careers. Once you’ve hit a certain point, it has to be abundantly clear that, if you actually desire to earn more money, then move on. We have to disabuse the public sector of the idea that they can or should be able to accrue earnings that are available in the private sector.
            For example, many trades now earn $80-100K per year, but that only places them on par with teachers. Yet, while we face a nationwide shortage of skilled trades, we are currently at an oversupply of teachers, with something like 1/4 of teaching grads not in the profession two years out of university. Conversely, and absurdly, every taxpayer in the land is being told we must pay more for teachers.
            But, here’s where it really goes off the rails- any machinist or welder making $85k knows that if he wishes to make more money, then he either has to expand his skill sets in a marketable area (CNC programming, underwater welding, etc.) or take the plunge into being an entrepreneur. Meanwhile, far too many of our public sector employees are amassing wealth at rates that should only be commensurate with those who are in business.
            For example, when I graduated high school, a school teacher earned today’s equivalent of $50-60K, and a principal of a 250 student high school made about $70K, adjusted for inflation. Now, those figures are considerably higher. It’s quite common for a teacher in Alberta with 10-15 years experience to earn over $90,000. Sorry, but that’s too high.
            Now, if that teacher switches to a private school, and the parents wish to pay him or her $90K, they’re free to make that choice. I still fail to see why we need to send teachers to university. I was taught for the first nine years by teachers who only had a two year certificate, and they were my best teachers, bar none.

            It’s just far too easy for public sector workers to receive the benefits that the rest of us can only achieve by making a career change or taking on substantial risks
            But, there are also a lot of people who go to work at city hall, or for the province purely because it pays better than the private sector. Our city has tons of clerical workers who earn 30-40% more than what they’d earn in the private sector. This is a common issue to most cities, and a subject of taxpayer concern for decades, to no avail. Bus mechanics and equipment operators earn more, as well. Like the rest of us, they make their choices based upon how they best look after their own families. It’s a gross disservice to taxpayers who work in those same professions or careers that they are compelled to pay the people who work for them, more money than they earn for the same work.

            Ultimately, it appears that you and I are on the same page- governments have grown too fat on the lambs that we raise.

      • Teachers are being squeezed? They’re facing their first pay freeze in a decade, and they’re making nearly 6 figures for 9 months’ work.

        As for CEO’s salaries, I agree that ALL subsidization of private companies should stop immediately. If companies want to pay their CEOs ungodly sums, let the owners foot the bill.

        • Ok I’ll except convenient targets as opposed to squeezed. There’s no doubt teachers are compensated generously. But please drop they only gotta work 9 months crap. Many teachers on salary. They get their salary averaged over the whole year. Iows words receive pay cheques over the summer (2) months. Those that don’t often do other jobs or teach over the summer.
          I’m married to teacher who I’m always complaining is more attached to her job than me. I see how hard the teachers in our community work, and how important the down time they get is. Most of the blue collar guys I work with wouldn’t last a week teaching; just in terms of the stress alone.
          Don’t rag on all teachers cuz some of them put their financial interests a head of the kids education.

    • Actually, you’ve been yelling to rein in spending and reduce debt not because the economy needed it, but because you wanted taxes reduced as well. Which is the wrong thing during boom times, and the wrong thing during recessionary periods as well.

      For instance, right now, if the early reports about December’s sales are any indication, we’re hitting the limit of our credit fueled spending that Carney enabled for us. When that happens, we’re going to start seeing massive unemployment as companies have to start downsizing because of slower sales.. meaning the people they let go stop spending and the companies they usually shop at start downsizing as well, and so on down the drain.

      To counter that, what we’re going to need is significant government spending. Ideally on projects that will have economic benefits for years to come.. so upgrading infrastructure or education institutions. Basically, the gov’t paying people to work so that they have some money to keep buying stuff.

      If they do that, the trick is that when we get out of the whole, that’s when they start reining in spending, and, equally as important, start increasing taxes to help slay the deficit and build a surplus for next time.

  8. kick debeers out of yellowknife and see how your economy suddenly grows the problem is governments say they need to trim the fat but they wind up cutting the meat and skeleton. the money holders / those profitting from the high oil prices are doing fine “RECORD PROFITS” its a form of corporate wellfare that is weighing down the economy not the few pennies we give to the people. get real its a global money grab for it should not be a nations’ responsibility to pay for the debt of globilization and war and not get the profits associated with those debt. It isnt too hard to gather …the media thinks your a bunch of fools. Wake up!!

  9. The article fails to point out what an economy is …and an economy is based on the natural rescourses and the services supplied by those that live in a populace… the America’s are rich with resources ad people willing to work the lack of business investing their government subsidaries in the America’s. When one takes the economy(MONEY) out of one place and puts it in another it does neither any good, it is robbing from a thriving economy and minnimally subsidizes a weak one for at $7 a week the person making your name brand sneaker cannot afford your product and now the unemployed citizen cannot afford it either!
    This greedy plan is doomed to failure as any old world view. Taxation without representation…do not tax me take my funds overseas build your businesses and leave me flipping the bill of associated debt while you reap the rewards!

  10. ALL the best performing countries in the world opperate on free market principles , its the unbridled greed of some corporations and the equal greed of unions in this country that are destroying what previous FREE ENTERPRISE economies have built before us.

  11. Ontario wastes over a billion dollars a year on unnecessary duplication and overlap in the school system, where 4 school systems (English and French public and English and French Catholic) server virtually every area of the province. That is the first rock under which the government should look to slay their deficit — before our truly essential services are hit any harder than they already have been by austerity and under-funding.

  12. Umm, okay so you write that alberta consistently blows its budget….yet it has no debt. No slanting of the information going on there lol. Nice journalism

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