How it starts - Macleans.ca
 

How it starts

ANDREW COYNE: Maybe today’s deficits don’t seem like much to get worked up about. They never do.


 

In 1966, Canada’s finances were in remarkably strong shape. Twenty years of fiscal discipline after World War II had brought the debt-to-GDP ratio to less than 30 per cent. Interest costs absorbed less than 2% of GDP, or about 12 cents of every tax dollar. The budget was in slight surplus.

As it happens, that’s more or less exactly where we stood a couple of years ago, again after a prolonged period of fiscal discipline: 30% debt-to-GDP ratio, interest costs of about 2% of GDP, small surplus.

In 2008, our fiscal position seemed rock-solid, as it must have seemed in 1966. And indeed, there are those, including in government, who assure us that even today, with a deficit of more than $50-billion, we have nothing to worry about. Though the debt-to-GDP ratio has climbed to 35%, that’s still the lowest in the G7. Five years from now, according to the budget, it will be back down to 32%. What’s to worry?

But then, what was there to worry about in 1966? We were then at the height of the 1960s boom — from 1963 through 1967, real growth averaged an astonishing 6.4% per year, a performance never since equalled or even approached. It was a time to dream big dreams: the following decade saw the implementation of all of the main components of the modern welfare state — medicare, old age pensions, the Canada Assistance Plan. It was expensive — real federal spending per capita grew by 78% between 1966 and 1975 — but revenues grew very nearly as fast: though the economy had by now cooled off somewhat, rising taxes more than made up the difference. Federal tax collectors took in fully two-and-a-half percentage points more of GDP by the mid-1970s than they had a decade before.

And so although we started consistently running deficits in 1971, no one much cared. They weren’t very large, after all, just 1 or 2% of GDP. Indeed, the debt-to-GDP ratio continued to fall throughout this period. By 1975 it was down to less than 19%. To be sure, inflation was rising, and interest rates along with it, but nominal GDP growth was still more than fast enough to keep abreast of the rising tide of debt.

But then came the recession of 1975, and the puzzling new phenomenon of stagflation: high and rising inflation even as growth was nosediving. And suddenly our fiscal position did not seem quite so rock-solid. Over the next few years inflation tore huge holes in the federal tax code. But while revenues fell sharply, spending was not similarly curtailed. The deficit leapt to 3.6% of GDP in 1976 (about what it is now), then to 5% in 1978 and 5.4% in 1979. By 1980, the debt-to-GDP ratio was back to 28%, roughly where it had been in 1966. But where before the debt was stable or falling, now it was growing by more than 20% per annum.

Too late, an attempt was made to rein in spending. In 1980, real per capita spending, which had been growing by 8 and 9% per year earlier in the decade, actually fell by 5%. By 1982, program spending had been brought very nearly in line with revenues. But by now this was no longer the issue: the rising cost of servicing the debt was. The deficit that year, at 4.4% of GDP, was almost entirely accounted for by debt charges, that is by the cost of paying interest on past deficits. At $15-billion, debt charges were now five times what they were in 1975. The momentum of spending had been broken. But the momentum of compound interest it had set off would not be so easily stopped.

Then came a second recession, much worse than the last — and with federal finances in a much more exposed position than before. By 1983 the deficit was cresting 8% of GDP. Soon, debt charges were consuming more than 35 cents of every tax dollar — three times as much as they had been in 1966. It would take another twenty years to get them back to where they were.

Yet it had only taken a few years to get ourselves into this mess. What had seemed quite manageable at the time carried the seeds of later chaos. Each stage of the crisis had set in motion the next: The rapid spending increases of the late 1960s leading to the first descent into deficit spending in the early 1970s, before the headlong plunge into debt of the later part of the decade that set off the near-exponential compounding of interest. Yet as late as 1975, the debt had seemed well under control.

Moral: Maybe today’s deficits don’t seem like much to get worked up about. They never do.


 

How it starts

  1. Seems disturbing but I think I need a bar graph or circle chart to be sure.

    • Bar graph! Bar graph! Bar graph!

  2. And those who say:" that'll never happen again!…all that stagflation and viscious recessions", have only to look to how this last calamity took almost everyone by surprise . The only thing we can ever say with absolute certainty, is that we don't know what will happen tomorrow or the day after. Ah,butdidn't i hear someone say the economy grew by 5% last quarter… no worries.

    • Flaherty noted that the economy did grow by 5 % in the last quarter, but he certainly did not say no worries, Both Flaherty and Harper have consistently cautioned us that though we are may be better off than most countries, this recession was serious and it will be a while yet before it`s completely over.

      Hopefully, we`ve learned from the mistakes of the 1970`s when deficit spending took a foothold. With a little luck, global recovery, and disciplined management we might meet the Budget projections.

      • Of course, Flaherty DID estimate that the economy will grow at 5% a year for the next five years, and based his budget on that. So, while he may not have said "no worries", he did say that he assumes this level of growth will continue until at least 2015, which is pretty similar.

        Also, you write: "Flaherty and Harper have consistently cautioned us that though we are may be better off than most countries, this recession was serious and it will be a while yet before it`s completely over". Do you mean the recession we were never going to go in to (followed by the deficits that were never going to be necessary)? Either you have a completely different definition of "consistently" than I, or you measure consistency on a remarkably short timeline.

        You may be right that we might meet the budget projections. And all we'll need is luck, a global economic recovery, and disciplined management. Yeah. I'm confident.

        • No worries were my words,not Flahertys…but i share your lack of confidence in his over-confidence. We may not have much to go on, but one surety we do have is Flaherty's predictable ability to get it wrong.

        • In 1993 Preston Manning said that we could eliminate the deficit in 4 years; a very optimistic prediction and he was criticized in the press for his naivety. But the deficit was eliminated in 3 and one-half years in part because of the encouragement of the Reform party. Let`s hope there is a similar optimism and pressure to cut spending from the Liberal Party of 2010.

          • I would be happy with any party trying to reduce spending.

          • He said we could eliminate it with significant cuts.

            Flaherty is saying it's just going to magically go away.

            Bit of a difference.

          • Then I would expect the Opposition to properly criticize the gov`t and force them to make those " signifigant cuts ".

            Oh but wait, there`s an Afghan Detainee! What Budget ? What Deficit ?

          • True. If our government has been responsible for endangering our troops by requiring we give detainees over for torture, that's actually a higher priority thing in my eyes too. We need to get that sorted out, and make sure the people responsible, from Martin on up, all face the consequences.

  3. This is ridiculous.

    The sky could fall tommorow! So let's shut down all gov't services just in case.

    No matter what the spending baseline is in your projections we could always get hit with a recession or depression and have our fiscal position destroyed.

    • So, is that a reason for more or less prudence?

      • Its not a reason for anything, its irrelevent.

        It goes without saying that projections beyond a year or two are pretty worthless and anything could happen.

        Putting aside the political realities that Andrew Coyne ignores on a regular basis, would serious budget cuts be a good idea?

        Of course. Junk the CBC for starts.

        Harper would be the first one to pull the plug on that. Why doesn't he ? Oh right, those political realities that Andrew Coyne constantly ignores.

        • Rather than junk the CBC I would like it to change into a media outlet similar to the PBS model in the U.S.
          Those who enjoy would just contribute accordingly with Tax deductions.
          Maybe some of the CBC employees could also contribute by offering their services on a volunteer basis. There is a well-watched politicial panel on Thur. nights where I`m sure the participants would gladly accept our heartfelt thanks in lieu of an actual pay cheque.

          • Maybe we could make the users pay for the RCMP too, I'm tired of funding tasers and horse rides.

          • So you believe the funding of police services and a publically-funded left-wing think tank have equivalent priority. Fortunately, those who set gov`t policies today do not agree with your twisted priorities.

          • Bad as the CBC can get at times, i suspect if we had a referendum on the need for a national broadcaster your side [and Coynes] would lose.

          • Is unpopular the same as wrong?

          • not at all. I happen tothink there's considerable support and need for a national broadcaster…granted i wish it were a better one than the CBC…but the i'm mostly a radio guy anyway…and that's been deteriorating too.

  4. Wait wait wait.. stagflation? Why that's unpossible! Everybody's saying that the lack of growth will prevent inflation.

    Why even that Craig Wright guy says we don't need to worry about it.. and he's like a chief economist of RBC. After all, he predicted 4.5% growth for Alberta's economy in 2008, how could he be wrong?

  5. Thanks, Mr,Coyne. Very interesting perspective. Food for thought, to be sure. We should all chew on it for a while. Afterall, proper chewing is important for a healthy digestion.

  6. Hmmm…..the same years (late 60/70's) economy starts to get bad – Viet Nam

    Today – Afghanistan

    War no longer builds up economies?

    • We aren't torturing them enough for that to work.

    • Are you laboring under the delusion that Canada fought in Viet Nam?

      • We had a good number of volunteers there, and i believe some observers, until Trudeau angered Nixon by pulling them out. More interestingly we probably made money off that war, without any of the real burden of suporting it.

        • No, I wasn't even thinking about that. I was thinking about the $cost of war and when the US sneezes we get cold.

          Good grief

          • I see. So by that logic, 2003-present should have been an economic wreckage because of the Iraq War, yes?

      • Didn't we supply oil to the US? Wasn't the oil price fluctuations that brought economic turmoil?

  7. Regardless of the particular economic state,

    having one's hard earned income taxed so that it can go to such non essential services as "language awareness training" for an entire government department two time zones away,

    is never a good thing.

    Once a society reaches a point where the justifications for the above are sufficient to confiscate the populace's property via taxation, you're pretty much gauranteed economic decline, until a shift in awareness occurs.

    The teaparty movement in the U.S. is just such a shift.

    N. America best be shifting soon, lest we go the way of Greece.

    The days of the entitlement nanny state are over. It's not a matter of ideology – just simple math.

    • "Once a society reaches a point where the justifications for the above are sufficient to confiscate the populace's property via taxation, you're pretty much gauranteed economic decline, until a shift in awareness occurs."

      The incredible growth throughout the 1980s, 1990s and 2000s notwithstanding, I guess.

      • did you even live throught the 80's? If you had you'd remember, crushing interest rates, job losses, oh and what was that thing again, oh yea, the NEP that singlehandedly ripped the guts out of the western economy.

        • BINGO. We have a winner. First to mention the NEP and blame it for a worldwide recession.

          Double BINGO for missing the point too. i.e. if the Biff is right we should have seen no growth at all instead of the growth in the 1980s followed by recession followed by growth followed by recession, i.e. the typical economic cycle seemed quite unaffected by Biff's tirade against bilingualism.

          • "tirade against bilingualism",

            therein lies the problem: as long as one can cloak an expenditure with the trappings of a high minded progressive ideal,

            no matter how lavish it becomes, it becomes sacrosanct and above consideration…lest one want to be labelled a knuckle dragging thug.

          • As long as we can cloak a desire to not fund progressive ideas or nation building projects in a sort of faux populist claptrap, we do have a problem.

          • western Canada you gnat

      • All of Europe and the US are confronting the startling realities of decades of increased government spending and entitlements that are simply unsustainable.

        You may be fine with my tax dollars going to quasi vacation junkets for government workers, but I'm not, nor are millions of Canadians.

        Cutting spending or raising taxes are the alternatives our government faces.

        The party that opts for the latter will be the party that spends a political generation in the wilderness.

        • Biff, you claimed "Once a society reaches a point where the justifications for the above are sufficient to confiscate the populace's property via taxation, you're pretty much gauranteed economic decline, until a shift in awareness occurs."

          Where's the economic decline? You folks have been promising us this decline for decades and decades now. Is this the wilderness?

  8. Honestly, the whole thing to me just seems pointless. Round and round and round we go. Yes Andrew, we are in deficit again like the the early 80's, and maybe we are on the way to more deficit. We had to break out of deficit to get back to a position reminicent of the one we had in the 1960's. And then the cycle continued.

    We know pretty well now that growth can't be predicted. Flaherty was predicting surpluses before the deficit budget came and the coalition crisis had passed. And now he says that everything being perfect, we will be our of deficit territory in 2015? I seriously doubt it. Economics is, literally, a crap shoot.

  9. Your history lesson makes me think John Turner would have put us on a quicker, better track if he hadn't blundered his way through that election…

    • well, he had a choice.

    • I can`t imagine how you came to that conclusion, unless it was just a reflex reaction of a life-long liberal.

      • Easy. Only conservative incompetants like harper and mulroney sadle us with endless debt.

        • Well it's not like Trudeau wasn't racking up the deficits with finance ministers like MacEachen, Chretien, and the aforementioned John Turner.

    • Turner would've needed to have taken over from Trudeau circa 1977, not 1984 to have made any real difference.

  10. So, I did some digging around, and came up with some Charts And Graphs on the budget (and recent budgets) — though more related to the previous post than this one, still possibly useful, or at least illustrative of the problem..

    Might help someone out, anyway.

    The most frustrating thing to me is that the coverage didn't really seem to mention any of this, on Budget night, but it's not actually that hard to figure out. You look at the last budget and this budget, go to the tables that actually have data in them (usually toward the back somewhere), and bam, one number is higher than the other one.

    O, the austerity.

  11. I don't buy the slippery slope argument for all deficits – it's entirely possible to run temporary deficits and grow out of them by constraining spending, just as the Conservatives say it is.

    The reason I believe the argument is valid here is that the Conservatives really haven't offered much in the way of constraining spending, growth is likely to be tepid and demographic pressures are about to wreck havoc on public finances, especially health care on the provincial checkbooks, which are already in rough shape.

    We face basically the same problem we did in the 80's – programs agreed to previously now need to be paid for, and they won't come cheap. Time to pay the piper (and if possible, get a job in the health care industry…)

    • The reason why the slippery slope is valid in this case is that it's VERY hard for governments to constrain spending, even if they want to. Most don't particularly want to. Controlling spending means controlling it in the areas of biggest growth, and those are also things that are politically difficult to control.

      So, they cut some positions that are empty anyway to look like they're doing something, while spending spirals ever out of control.

  12. Joe Clark and John Crosbie figured this out in 1979, but they paid a political price for their attempts at fiscal restraint.

  13. The responsible thing to do would be to raise taxes in the short term, start targeting a surplus (i.e. build a contingency into a balanced budget). {Tax increases are more predictable than spending cuts and can be implemented more rapidly, deep spending cuts can have years of transitional expenses.} Use some of the excess to pay off the debt, some to make one-time investments that have value for Canadian society. As the debt is reduced start progressively lowering taxes.

    Of course, I am not a politician and such a platform could never get elected.

    • Oh this sounds sensible but isn’t as realistic once political realities set in. As tough as it is to govern with a budget deficit, the real challenge occurs once you create a surplus (which is why Martin did everything he could to hide his and make it look smaller than it is).

      If Stephen Harper were to raise taxes to create a surplus which could be used to pay off debt, he would first get attacked by those people telling him to raise taxes. Then every special interest group in this country would be sitting in front of CBC cameras talking about how the government cared more about repaying money to banks than they cared about children, aboriginals, equity, accessibility, etc.

      If there is a lesson to be taken from this article its how much danger the nations finances could be placed in if we allow national governments to keep talking about things like national daycare, Kelowna Accords and the like. Whatever their stripes, government departments to not necessarily shrink when the economy goes bad. Unionized workers do not offer their concessions back. And although every new social program comes with the argument “With all the growth it will create, it will pay for itself!” they almost never do.

      • Tim, I realize that you are a conservative… but investments in early childhood support have been shown to pay off in significant areas health, crime etc. However returns on those investments ultimately show up in in quality of life indicators for society not as a financial ROI.

        • Stewart;

          It’s sort of assumptive to write me up as a conservative. I do find a little too often that people who disagree with opinions feed the need to apply labels to people in order to make their argument. I consider myself a free agent, unwilling to commit myself to any party. I feel this way because far too often I have seen all of the parties seemingly do 180 degree shifts on policy beliefs just because they knew it would be good for them in the polls. I believe what I believe.. If your party feels the same way you have my vote. If it doesn’t then too bad.. I won’t be changing my believes to fit a politicians aspirations.

          Unfortunately, if I go through federal budgets looking for things to cut I will always find some group prepared to fight me to the teeth in defense of the line item which gives money to them or to one of their friends. Knowing this is the case, and knowing that finances have always been fragile I am never prepared to raise my hand for the creation of new departments and projects unless the arguments for them are absolutely bulletproof. I believe in the things I do, not because I am Liberal or Tory but because I have felt the effects of the cuts which were forced upon us.

          I was a university student in the 90s when Martin cut funds to the provinces which were earmarked to social purposes. Those purposes were welfare, healthcare, and universities. Now since any party to cut the first two would have been committing suicide this meant my tuition doubling over 2-3 years. It meant lots of new ancillary fees and it meant larger class sizes.

          When Martin and Chretien had defeated the deficit which was a massive victory, they committed what I consider to be the massive fail…. and it wasn’t a failure to bring in tax cuts..

          There should have either been a national conversation with voters in order to convince them on the need to massively reduce not just the deficit but the debt, or there should have been efforts to return funding to provinces… or a little of both… Instead, election time came and it was time to bring out the federal goody bag including things like National Daycare….. which anyone in the know would tell you was going to cost a WHOLE lot more than we were being told.

          Here is the irony…. You yourself wrote of the need to raise taxes just to pay down debt. Then stepped in to declare the need for more program spending….in doing so… you made my point.

          • Tim, when I described you as a conservative, it was in reference to your apparent philosophy as described in your post. For the record, I have a lot of respect for conservatives and in many respects consider myself one.
            (Obviously I have less respect for some of the current members of the Conservative party)

            I also agree with you that social programs need to be both justified and accurately costed. In particular as you noted deep cuts are difficult for the entire country but catastrophic for some individuals.

            Where we perhaps can agree to disagree is that I do not see the above pitfalls as sufficient grounds for the government to walk away from our most pressing issues. Your two examples:

            The relationship between the Canada's government and her native people is a festering blight that impacts both our internal politics and our ability to project Canadian values abroad.

            Canada's children are our most important resource and although the majority thrive, far too many do not.

            I elect my MP primarily to look after big complex issues that require a national approach, and I expect my government to work in a systematic, cautious fashion but towards ambitious goals.

            Clearly, I also enjoy some of the petty scraps that take place in partisan politics as theatre, (it is perhaps slightly better than Hollywood gossip) but I certainly do not consider them important.

          • I'll accept your points Stewart and choose to disagree on some of them, though I do wish to emphasize a few points.

            I think the most pressing problem in Canada for the last 30 years has been a growing debt which has negatively affected my generation and will negatively affect my children. The result of it has been the decimation of many government programs. Existing programs, including health care are not of the stature they were 30 years ago (although its surprising how often the equipment looks 30 years old). For example, I can tell you for a fact that if your child gets sick and you bring them to a hospital, they could be transported to a foreign city for care, simply because your home town hospital doesn't have enough money in its budget to have enough nurses on the floor. I have seen cases where parents have given birth to sick twins, and experienced having one twin kept in the hometown hospital and the other sent to the first staffed bed….in Chicago.. (That's the back up)

            Unfortunately, whenever government cuts or tax increases result in surplus funds, governments of all stripes tend to stick their fingers in the air looking to see what popular notion is blowing in the wind. New programs are started instead of needed repairs to old programs.

            What we truly need are leaders prepared to stick their heads in the air and on television to argue the importance of balanced budgets and debt pay downs. They need to create a new consciousness. And they need to avoid like the plague the arguments around social benefits of new programs…because the old programs have social benefits too….and cannot be paid for… so we get inferior versions of both the new and the old… and more debt to decimate both in the future

            Unfortunately, politicians have a very easy time sticking the names of their parties on novelty checks and sponsoring new buildings

      • I agree with your assessment. Government spending never pays for itself and it is always far more hard to reverse it than it is to spend it in the first place. Not only that, the visible benefits of the spending are always outweighed by the invisible harm it does to people across the country.

    • Bring back Paul Martin…just tell him he can never, ever aspire to be PM again.

  14. Your analysis is probably correct, but sadly we are in the midst of a game of chicken: the first party that admits that Canada has a financial problem and needs to either raise taxes or cut spending loses.

    • *sigh*

    • [blockquote]Your analysis is probably correct, but sadly we are in the midst of a game of chicken: the first party that admits that Canada has a financial problem and needs to either raise taxes or cut spending loses. [/blockquote]

      This is probably the most astute comment on the political situation we have that I've read to date.

      Both the Libs or Tories need a majority win to make the tough decisions. The Libs would raise taxes (just like Dalton is doing in Ontario with HST and health premiums). The Tories would cut government spending. Either one would balance the books, both have negative consequences when it comes to economic growth.

      • Nice bit of revisionism. The federal Tories encouraged the provinces to set up the hst, and the tories have a tax raise all of their own…i believe it's known as a payroll tax.

        • Lots of revision from both of you. The HST is really something agreed on by both political parties, except when some like the Ontario Tories see opportunities to score points.

          The HST is a Jean Chretien/Paul Martin construct and was negotiated with the maritime provinces and B.C. quite some time ago. (I suspect it probably sits in both parties policy papers long before). The governing conservatives openly pressed the Ontario liberals to adopt this policy. The Liberals chose to do it. Both parties are well attached to this policy with lots of history and the loser is whichever party decides to deny it

  15. Then came a second recession, much worse than the last — and with federal finances in a much more exposed position than before. By 1983 the deficit was cresting 8% of GDP. Soon, debt charges were consuming more than 35 cents of every tax dollar — three times as much as they had been in 1966. It would take another twenty years to get them back to where they were.

    17 comments so far and no one has blamed this on the NEP? Must be a new record.

    • Alberta is on Mountain Standard Time. It's very early there. Be patient.

    • Thanks, I thought the correspondence that Coyne was suggesting was not quite so close. (Of course, as usual not that anything he said was incorrect either.) A big difference is that the debt was much smaller in the 60's, but interest rates were much higher. I would guess the cost of carrying the debt, normalized to GDP was similar, but I would surmise we are in a much more volatile state today. (I am no economist, but I have observed that economists seldom predict big fluctuations in interest rates far in advance)

      • Interesting point on historical interest rates. It's now taken for granted that low interest rates help to create wealth for individual, corp., and state. Yet our personal indebtedness is at an all time high. I wonder at what point low rates cease to be a good thing, and become a risky spur to overconsumption and excess?

        • Perhaps Steven will weigh in on this, but my suspicion is that it is important to look at interest rates and inflation together. (or perhaps their difference) The middle class of my parents generation became very wealthy (relative to where they started) through home ownership. They took on large debt loads (tens of thousands of dollars) at modest interest rates and then when through an inflationary period that reduced the real cost of their mortgages to virtually nothing. I suspect this is another difference with the 60's comparision, the general public was far less in debt (relative to their earnings) than we are now.

          • Currency infuences inflation which influences interest rates and interest rates/debt/trade influence currency the most. At the risk of being more confusing, interest rates influence everything and what influences interest rates the most? Risk. Probably the biggest risk of all is not so much to elect public officials deciding such policy to actually be competant, but to also actually serve the public trust as opposed to self service.

        • Interest rates only created wealth if its invested wisely. For the most part, all I see Canadians investing in right now are used homes and household goods that will only get older and timed out. The "great Conservative credit expansion" brought by loonie tunes CMHC regs will breed a recession with the rise of interest rates taking an increasing bite out of disposable income. Way too many Canadians are in over their heads. They will wake up from this year with "what the hell was I thinking" thoughts next year to be replaced by, "I'm not sure if I can make it" thoughts the year following, to "oh my God, I'm broke" thoughts the year after that.

          We are about to begin a credit contraction beginning with rising rates once the U.S. raises their rates. I can't see it happening before then as the loonie will rise with an uptick in rates in Canada so the loonie has to be below par and the U.S. feds have to raise their rates before hand. Interest rates rising are unavoidable regardless, due to intergovernmental debt rising nearly 9% of real GDP. Annual combined governmental deficits like this are unsustainable and we will soon find out why.

    • Interesting charts. I was looking for charts with historical annual federal & intergovernmental debt. I do find numbers to be very "illuminating".

  16. As Twain said, "history does not repeat itself, it rhymes"

    This is familiar territory, but as AC's article points out, the spending train wasnt derailed till too late in the scenario. As someone else said, its a crapshoot. Given that its a crapshoot the only thing we can control absolutely is discretionary spending, all other things including taxes and transfers are largely derived amounts from the state of the economy.

  17. The 800 pound gorilla sitting on the Finance Ministers lap through all of this is the U.S. economy. Put simply, if they don’t buy, we don’t sell. Canada does not exist in a vacuum, economically.
    All the projections and growth charts forget what seems obvious to many- the U.S. economy, apart from executive bonuses, continues to spiral downward to what at present seems a bottomless pit. That there are more and nastier shocks to come is a given. And, as always, they will drag us, and much of the world, with them again.

    This budget for me was a deja vu moment to the pre collapse budget. “Who could have seen it coming? “they wailed.

    Well, many did. And do so now.
    I’d fill up your gas tank while there’s time.

    • Hmmm Bill I dont know how many saw it coming in the form that it came. Check out any of the major bank forecasts as little as 3 months ahead of time. That being said, it doesnt mean that the situation wasnt identified as unsustainable, the timing wasnt known, nor was the strength.

      But I agree that our major buyer is in deep do do, not unrecoverable but also on an unsustainable path. All the more reason to eschew luxuries on our part, control what we can and leave as much room to manouveur as possible when whatever storm comes blows up from the south. The added advantage is we maximize things if life turns out to not be as dark as we fear, which sometimes is the case. But whether we get 6 motnhs, 1 year or 3 years respite there are wrenching chnages that will happen in the US to ensure they pay off their debt.

    • Every single "Austrian-school" economist not only saw it coming, they were jumping up and down screaming about the danger…all based on Von Mises 1920s theory of money and credit.. You could make a compelling argument that what we see today is not an unforseen event, rather a desired result by some in positions of economic power. Be aware that the same economic interests are pushing cap and trade and carbon exchanges. I realize I'm on thin mainstream ice, but since I lack a PhD. in Keynesian economics I KNOW I am unable to endlessly pay my Visa bill with my Mastercard and insure against bankruptcy by buying default insurance with my AmEx card…in a nut shell that is Wall St. finance.

  18. Well I'll be the first to say NEP,
    but in the context of lessons learned, never to be repeated.

    Same with the Chretien/Martin years, slaying the deficit on the backs of the Provinces and the Military, only having to 'fix' the problem 10 years later.
    Get off that merry go round.

    I think this government has it right. Don't cut essential services,
    take a scapal to the fringe special interest vote buying spending.

    And it's time to revisit spending that was considered essential in 1980, but in this day and age has questionable value or at least unfocused purpose…..like the CBC

    • Until Canadians are convinced the nanny state is unaffordable, cutting the bloat in our civil service and program spending is near impossible.

      Example, the now well known prof Attaran is going after the Canadian taxpayer to pay for infertility services,
      because,
      wait for it,
      it is a human right.

      • "take a scapal to the fringe special interest vote buying spending."
        Like all those billions in novelty cheques they're handing out; that's not any kind of special interest vote-buying spending…

        "Until Canadians are convinced the nanny state is unaffordable, cutting the bloat in our civil service and program spending is near impossible. "

        Oh move to America already. Let us know how that goes. Leave the rest of us, who prefer to be able to help take care of the sick and the old so that we might be okay when we're sick and old (and because we'd like to try to do something decent in our lives rather than just hoard money that we can't take with us when we leave) alone.

        • Electing a government to spend money it doesn't have and, thereby, destroying today's capital and dedicating tomorrow's labour, except, of course, for civil servants, who, on top of extortion-rate salaries, are guaranteed cost-of-living increases in perpetuity, is not decent.

          • Are you talking about all those teachers and nurses again? (they make soooo much)

          • Not primarily. It seems to me that the public sector is loaded with workers doing unskilled labour at highly-skilled rates. This is where I would like to see the cutting commence.

        • So, leave the rest of us to help take care of the sick?? You thinking of Danny Williams? You know, the guy that temporarily moved to the U.S. because he was, you know…….sick? More Liberal pap, that in the real world that the rest of us live in, does not exist. Unfortunately, Canadians like the taste of pap!

          • The sad reality of it is that we have doctor shortages in this nation in every province but New Brunswick and this won't be fixed by lowering doctorate education standards immigrants with training elsewhere come to Canada with.

            The sadder fact is that there isn't any one party to blame with this. We can blame all of them. The solution is to have the feds offer grants and scholarships that cut the cost of education (they need 8 years plus readers) with a contract that keeps them from practicing anywhere outside of Canada for the first 10 years upon graduation. Since the political expectancy of survival is much less than 10 years to see Canada train enough doctors in the system to address the shortage, look for a lack of political will. Even saddest of all, is partisan leanings like yourself who would blame just one government when all of them have failed us including and especially so, the one we have now. Its called "broken promises".

    • So what do you say about the military cuts that Harper is implementing then Wilson? He has floated off of Martin's budgetted spending for four years now and now that we are hitting the fifth year, when all of Martin's budgetted military increases end, he is cutting military spending.

      • Military spending cuts also started under Mulroney…but Wilson wasn't paying such close attention then.

        • Yeah, Mulroney really cut back when he decided to go in with Bush to invade Iraq the first time. That was a 14 billion dollar waste.

    • It wasnt' the NEP that killed the oil and gas industry in the 80's. It was the East's refusal to pay world prices for western energy, combined with crashed commodity prices. I double dare you to challenge me on this. Alberta… they could have lived like Saudi's if they would have domestically owned lion's share of their resources. Now they just live like Albertans.

      As for your dig on Martin, we had intergovernmental debt to GDP ratios peaking at 100%. Do you actually think you are going to convince us that drastic cuts to provincial transfers, selloffs of crown corps (railways) and ballooning corporate/individual income taxes weren't needed on top of the GST? Under Martin, our GDP doubled in 12 years. Thats how we fixed the problem. As for your "government" getting it right, maybe they should take a scapal to themselves and the CBC… thats smart. Just get rid of the CBC while Canwest with over 30% market share is in recievership. You either work for a lobby group or are brainwashed by one to have said this much.

  19. I've never understood why people are content to see the government run the nation's finances in a manner that, when we see it in individuals, we automatically recognize as completely reckless.

    • Because they believe it serves the common good.

      • No, because way too many politicians are serving themselves and were doing so long, long before they became elected.

        • And would you say that this is a problem with democracy that can easily be corrected or circumvented?

    • You're kidding right? Our personal indebtedness is at an all time high. The average citizen is no longer the benchmark for fiscal prudence. We've created a consumer monster, and all we seem able to do is keep feeding it.

      • true enough,

        the problem is, when the monster turns on us with its teeth, we expect the government to bail us out.

        All of those folks in the US who bought houses they couldn't afford, didn't have guns to their heads. And when lo and behold, the market caught up to them, what was the answer?

        Government bailouts.

        With nanny state looking after us, who needs personal responsibility.

        The problem is, eventually the government runs out of spending other people's money. In the US, that point is right about now.

        • While i see your point i have to say…tell that to the bankers.

        • Actually, the government bailouts were only there for the largest. Those folks who bought houses they couldn't afford got their lesson of pain, suffering, humiliation, and embarassment that you feel they so righteously deserve because they acted entirely rationally when you look at the information they were being given (Interest rates would remain low and housing prices would continue to rise so that they could always refinance at renewal time.)

          People have personal responsibility.
          Corporations do not

          The problem is that the corporations have a vested interest in ensuring we never remember that at the end of the day, it's the people who determine government, and a lot of resources to attempt to warp the discussions and include falsehoods like you claim above.

          • It really begins with CEO's as its top down.

        • All of those folks in the US who bought houses they couldn't afford, didn't have guns to their heads. And when lo and behold, the market caught up to them, what was the answer?

          I hate to point this out but those folks would never have qualified for what the average investor understood to be a mortgage unless the rating agencies were failing in due dilligence and unless the Investment banks brokering the deals (who were ruthlessly shorting ALL the debt swap vendors they were buying their default insurance from) weren't colluding. But for specific legislative changes, aggressively lobbied for by the investment banking sector, this debacle could never have transpired. Those would be the same banks who were just bailed at out to the tune of around $700 billion at the expense of the same folks they were soaking in bogus AAA mortgage securities. This is CRIMINAL FRAUD on a scale never before seen…yet "none dare call it conspiracy"…check out why that expression exists.

    • Perhaps because government and invidiuals are different things. Ideally, governments run their budgets countercyclically, in order to be able to provide assistance when we need it, and replenish from us when we don't.

      • Like you say… ideally.

  20. This is the first realistic appraisal of our financial situation I've read. The problem is that most economists are reluctant to make the same assessment publicly for fear of dampening an economic recovery – if the general public knew what they know, people would stop buying on credit with reckless abandon, and even more jobs would be lost. And there's nothing to be gained by the 'loyal opposition' in proposing that selective tax increases would mitigate the prospect of returning to the 1983 reality of 35 cents of every tax dollar going to service the national debt because, after persuading Canadians that there would be no recession in this country, Harper & Co. are now persuading them that we can 'grow' our way out of this mess.

    • The bigger problem is twofold. Most economists firstly are acting in their own best interests, working for firms that act in their own best interests and as such are to blind to see the sheer magnitude of the problems or their solutions or spin when they do see the truth. The second problem is in trying to educate voters to stop electing lobbyists in government. Their agenda's won't change regardless of the so called role of "public service" they were elected to fulfill. Its well past time to ask what Harper's agenda is.

  21. Debt is wise when it is used to fund future growth in income potential. Most businesses think in terms of ROI and perhaps we should too. Debt is unwise when used to fund current expenditures that do not build anything for the future but are simply consumed on services or products for today. A Government can take a long-term view while not neglecting the short-term.

    • Do you believe it is wise to run up a massive credit expansion in real esate, mortgage bonds, lines of credit & credit cards and based on pumping up valuations of older homes only to see this wealth disappear with higher interest rates? Where is the income potential in heaping huge debtloads on the consumer with rates having nowhere to go but up? This has been federal policy for 4 years thus far…

  22. Obviously, the plethora of tax cuts enacted by Trudeau had nothing to do with the deficit in his time.

    • The numbers tell the story. Pearson left Canadians with 37 billion in debt in 68'. Trudeau left Mulroney $194 billion to Mulroney and we did end up with some things to show for it. Crown corps, insulated homes… Mulroney left Paul Martin with $524 billion to deal with. (yeah, they racked up $330 billion worth of fresh debt over 10 short years) Martin left Harper with a guessed $50 billion less. It doesn't take much of a guess in terms of where Harper will leave Canada.

      Other than old gripes to complain about I fail to see what a comment like this can do to constructively add to this blog.

  23. There are a lot of places where cuts could be made without affecting the lives of ordinary Canadians. Cut the $1-billion per year subsidy to the CBC. This organization has strayed so far away from what it was 10 years ago it is hardly recognizable. Examine all of the NGOs who get cash from the government and never get off their collective backsides and raise money on their own. If they can't be bothered to raise their own money, maybe they shouldn't be feeding from the public trough.
    Cut out advertising, consulting and political staffers from all parties. That way we can get rid of big costs and maybe find out what our political representative actually think on their own.
    Make our corrections system a little less swank and make them a breakeven operation. Why should it cost $100,000 to keep a prisoner when the rest of us don't have anyone spending that much on us. If we're going to spend $100K on someone, let's spend it in the education system.
    Just a few ideas where cuts could be made and wouldn't cost most ordinary people any dollars or sleep.

    • Wow, thats smart. With Can West suppling 30% of our mainstream media and in bankrupcy, people like yourself want CBC (24% of market share) going broke too. Did you ever happen to think that we actually need media services in this nation and from government entities precisely because of the service they provide not to mention they don't go broke?

      Your estimated costs of incarceration are also out of wack. The average cost of incarceration for Ontario males is $157,000 and $260,000 for females. Prisons are schedules to be built all across the nation in anticipation of tougher crime bills that do just that. Sounds great, get tougher on crime, wins some votes from the white hairs but in the end, the question still has to be answered… "who pays for it"? Watch for this government or for Conservative provincial governments to try privatizing prisons with the same speil (lower costs). Its such a failure in the U.S. with private prisons lobbying states for tougher crimes and states going broke because of incarceration costs, I don't know where to begin. Ah… read more, type less?

  24. I find it disconcerting that Andrew Coyne limits his analysis simply to numbers; in essence he has taken the "bean counter" approach. This simplistic approach ignores the varying needs of our society. Anyone with any memory can remember that the cuts made by Martin and Chretien to "slay the deficit" also severely damaged some important government programs, the prime example bring health care sevices. During this period I am sure Andrew Coyne wrote about how the country's ifrastructure was decaying, productiviyt was declining and research and development was not being funded properly. Andrew, let's have some real thoughtful analysis please; some that takes the issue beyond what any accountant can accomplish.

    • Ah, dude… it is a mathematical equation. Numbers tell the story. Sorry if numbers are lost on you.

      As for the rest, would you have preferred national bankrupcy? Do you not recall Martin selling off our crown corp railway in an effort to keep this nation afloat? Do you not remember corporate/personal incometaxes skyrocketing to the moon with 7% GST's and still running deficits? Have you forgotten how extreme our credit crisis actually was (close to 40 cents of every government revenue dollar was going towards interest rates on debt never mind principle at our debt service peak) or how high interest rates on national debt and fresh debt actually was? I hear the same old, tired, warn out arguments over and over always coming from the same angle and its always promoted by false beliefs the most notable of which is… we actually had a choice with government spending. Too many of us actually lived through this tough times, ok? Try your false history lessons somewhere else.

      • You should avoid from juvenile stuff like "dude" and putdowns about numbers being lost on me. I am a professional with advanced degres in engineeing and business management. I have enough experience to know that establishing budgets for government, business or households is NOT simply a mathamatical equation; it is much messier and much more complicated than that. The budget needs to take into account how it will affect people. The budget needs to take into account the condition of the country's infrastructure and national institutions. The budget needs to take into account the income level and demographics of the population. Get the idea? Fiscal, social and religious conservatives often prefer to reduce complicated issues involving human beings and the economy to something more simplistic that they can understand and articulate. For fiscal conservatives the only thing they can focus on is taxes, debt and deficit. Religious conservative tend to look for the answer to everthing in the bible. Social conservatives want everyone to look and think just like they do. But hardly anyone thinks any of this is "just a mathamatical equation".

  25. This post was a complete waste of Andrew Coyne's time.

    God, I wish I had job like that.

    • I think what you really meant to say was that your own post was a waste of time and what you really want to do is become a propagandist so you can get paid for your own brainwashed, false beliefs.

      Of course, I'm probably over analyzing. Its much more likely that you just aren't that bright.

  26. And therein lies their mistake, my friend.

      • No!

  27. Nice job, Andrew. Like some commenters, I wish you had pondered the possible futures in the event the growth never materializes. If the US double dips, then govt revenues will fall and the deficit will grow ever larger. Then what? Another round of stimulus spending? God help us! And yet that is the Keynesian version of Russian roulette that is staring us in the face. Another stimulus — oh well, what's another 50 billion between hockey fans?

    Is it just me or why is no one considering the possibility of a double dip recession in terms of this budget? Then we will be well and truly in the hole because there will be enormous political pressure to prime the pumps again and bail people out yet again.

    It's all fun and games until someone loses an eye.

  28. Yes, but it seems the world is full of Keynesians now.

    And we all know (I think we all know at least) that the most important thing to get the budget fixed is to get economic growth back, and to get some real productivity growth too.

    And the economic consensus these days (personally, I don't believe in it, but it seems EVERYONE else does) is that these counter cyclical government spending binges will get us there.

    So as long as Harper follows through on a REAL austerity budget in the next couple years, we are on the right track, no?

  29. Excellent points, Andrew. For the rest of the readers out there…

    http://www.bcrealtor.com/d_bkcan.htm

    What do you all think will happen once interest rates begin to rise? Try the deflation of hard assets and if governments continue to rack up 100 billion in debt annually like they did last year, try a loonie under pressure causing inflation of imported goods. Where I come from, it spells stagflation. (I know, I know, the U.S. dollar woes… add them to the UK., Japan, Spain, Portugal, Italy, Greece, Irland, Germany… (cont)

  30. Canadians have been lucky. For the last 20 years, we've been in a credit expansion cycle created by falling interest rates with a loonie that has lowered the cost of imports over the last 11 years.

    http://www.cbc.ca/news/background/economy/loonie….

    This credit expansion has heavily accelerated by the combination of low/record interest rates and long 35 to 40 year mortgages with little to nothing down. As a consequence lines of credit have quadrupled in just ten short years. Credit card debt has skyrocketed. Canada is poised to hit a trillion worth of mortgages by the end of this year. This credit expansion is poised to contract with a rise in interest rates and when it does, it will breed a recession. Again, stagflation is where we are headed, it was preventable through tigher CMHC regs and prudent government spending/taxation. Eessentially, what we are witnessing is the creation of a stagflation environment breeding a long, drawn out recession. I wished I was making this stuff up. Maybe we'll vote more wisely next time?

    • Was there an alternative economic (fiscal/monetary) policy to vote for?

      • Yes, there was. Its my belief that there was, most definitely all along. CMHC had 25/10 regs back in early 2006 for a reason. It didn't get there by mistake. The way I view it is simple. This isn't about left or right acronym's but rather, about policy that is either functional or dysfunctional. We are witnessing nations hitting debt crisis's as evidenced by intergovernmental debt to GDP ratios appraoching or past 100%. The U.S., Japan, U.K., Spain, Portugal, Italy, Greece, Ukraine, Germany… all have one thing in common. They've committed the same policy sins I'm talking about here. They've created RE bubbles that don't generate real income… based on easy credit… cheap monthlies… and when interest rates rise, debt service swells, credit contracts, RE values fall, currencies spiral and inflation rises from the higher costs of imports. We've seen this movie before and the environments that breed this are playing itself out here, obvious to most who look.

        • And when has monetary policy ever been subject to plebiscite or vote? When has it been an election issue?

  31. Could you please explain the real difference between 'parliament' and 'government'