Blood on the Tracks
The Dubious Legacy of Deficit-Slayers
Chrétien and Martin
by V. T. Rowan
In the orgy of words devoted to the passing of the axe from Canadian PM Chretien to former Finance Minister Martin, some adulatory, some Aesopian, everyone seems to agree that, whatever else passed between these two, they slew the deficit-monster. I beg to differ.
The record shows that the Biblical Gog and Magog had less blood on their hands than this misbegotten pair. For the sake of an insignificant change in the debt/GDP ratio, whose only purpose could be to make the already insanely wealthy feel better about themselves and their futures, tens of thousand of Canadian lives were shortened, made meaner or actually impoverished. Harsh words! Indeed, but deserved.
Let's look at the basic numbers. The following table provides a summary of them. In this table:
- FY = fiscal year
- PDI = Public Debt Interest (the interest payable on the public debt
- GDP = Gross Domestic Product
- expenditures consist of program costs plus PDI, which are shown in the rows below expenditures
- all figures other than percentages are billions of dollars
- red figures in parentheses represent deficits
- figures in italics are estimates of what various figures would have been under different assumptions; explanations of these assumptions follow the graph.
I've tabulated the key Canadian government finance variables (revenues, expenditures, public debt interest, deficit/surplus and debt), as reported in Annex 6 to the 2003 Budget plus some additional lines which I will now explain.
- The first additional line - Surplus/Deficit(1) - shows what the deficit would have been under the simple assumption that expenditures were maintained at 95/96 levels.
- The next line - Surplus/Deficit(2) - assumes that expenditures were not reduced in 96/97 and then grew at the same rate as they actually did after 96/97.
- The third additional row - Surplus/Deficit(3) - adds back the additional revenues garnered from taxation as those that received the payments from higher spending paid their taxes.
- Surplus/Deficit(4) then assumes the normal "multiplier" effect on tax revenues as that higher spending is respent.
In each case the Public Debt Interest (PDI) is recalculated using the same average interest charge as actually occurred. The impact on the total debt is then shown.
The key year was FY 96/97.
Note that all the 96/97 cuts achieved was the elimination of the deficit by 98/99 rather than two years later. Were the very real hardships created worth those two years?
According to legend, Martin discovered the power of line-by-line review and this enabled him to force cuts on a bureaucracy that had always successfully resisted. Without going into detail, the fact is that almost all the cut were to the Canadian Health and Social Transfer (CHST).
Who are the eventual recipients of such funding? Patients in hospitals and physicians' offices, students and those requiring various forms of social assistance. It's not easy to figure this out exactly but over the period the cumulative reduction to these recipients I estimate to be about $15billion.
It works out that the reduction in cumulative interest payments (about $13 billion) is roughly the same as the cumulative reduction in funds to the ill, students and the disadvantaged.
A clearer exposition of priorities could not be devised. The Liberal government regards purely paper transactions to be more important that the health, education and welfare of Canadians.
But aren't we drowning in debt? Aren't those interest payments saved a worthwhile "first step" in staunching the bleeding? No and no.
Jim Tobin, a Nobel laureate in economics, who is from a generation that remembers the Great Depression, has spent his career reminding his right-wing peers that for every buyer there must be a seller and vice versa. For every liability there is an asset. Moreover, the accounting of the flow of real value from assets is incredibly arbitrary.
The $500billion debt on the books of the federal government is matched by real assets conservatively worth three or four times that amount that are either unrecorded anywhere, merely because of accepted accountancy rules, or recorded on the books of agencies of other levels of government or private corporations.
The incredible irony is that both le petit gars and "big idea man" Martin have been trumpeting "innovation" as the cure-all for Canada's future economy. From where does "innovation" come? From the minds of humans. Humans who are well-educated, healthy and well-fed tend to be more innovative than those who are not. That's why Burkina Faso has a per capita output of $220 and Canada $22,000 (US dollars). This is the most neglected yet singularly valid observation from 50 years of study of economic development.
What is it that Chretien and Martin's policies are systematically hampering? The creation of healthy, well-fed, well-educated humans.
Who are the recipients of those dreaded interest payments? Overwhelmingly, other Canadians. Even in the worst case, if C&M had not butchered the CHST we would have paid foreigners $13 billion more over 7 years to help educate and improve the health and well-being of Canadians. The extra future output of those thus educated and helped is unquestionably much higher than $13 billion. Why is this a bad deal? It isn't.
Moreover, since most of the interest was paid to Canadians this is more like rich Uncle Bob paying for young Carol's student loan until she gets a job. What's the sense in refusing Uncle Bob's money to finance young Arthur's tuition if it means a lifetime as janitor at Burger King? You might say that this depends on Uncle Bob. The overwhelming evidence is that Canadian investors have no reluctance to buy Federal securities. On the contrary, they love them. These are the counterpart to the loans in our homely analogy.
Doubters might say: it's all very well to make these incremental arguments but surely there's some limit to government borrowing and interest payments? Precisely my point. Whatever those limits are there is absolutely nothing to say that we were approaching them in 1996.
Here's some background. In 1945 the percentage of Canadian debt to GDP was 150%. It fell throughout the 50s to 50% and went as low as 25% by 1975. Does anyone remember 1975 as an economic Golden Age? It then rose steadily (as the US Federal Reserve "monetarist" policies under Paul Volcker drove interest rates through the roof to fight the previous monster -inflation) and in 1996 it was 55%. It was 46% in 2001/02. If Little and Large hadn't wielded their axes it would have been no more than 5%. Again, I ask was all that misery worth 4%?
On a technical note that serves to emphasize the stupidity and bloodymindedness of Chretien and Martin, the 2002 numbers are on a "full accrual" basis, which means that the beans get counted differently over time. It also means that a direct comparison with earlier financial statements is not possible. (This is why it isn't worth tabulating my estimate of the CHST "shortfall".)Yet a crude comparison is revealing.
The table below tabulates the differences between the old rules and the new rules. For example, revenues for 94/95 are reduced under Full Accrual by $13.6 billion but expenditures reduced more ($15.4 billion) so that the net effect is to reduce the reported deficit by $1.7 billion (negative figures are again in red and in parentheses). The figures for 97/98 and 98/99 represent a reduction of the surplus. This just serves to illustrate the quite arbitrary nature of financial accounting, especially as it applies to governments.
I hope you can see that it's reasonable to say that all the C & M bloodletting in 96/97 achieved was a one-year acceleration of the Holy Grail of deficit elimination (since $6 billion in 97/98 - see the first table - could be attributed purely to accounting).
More generally, it's a mere convention that does not allow governments to accrue investments in assets on a "balance sheet" as is the case for private corporations. If governments and corporations had their books done on the same basis it would be clear that governments are far more prudent than the private mouthpieces of fiscal responsibility. The last effort I saw of an attempt to construct a balance sheet for Canada was in the early 1990s. It valued Canadian assets at $11 trillion. Even if you add up all levels of government that's a debt ratio of about 10%. Try to find a corporation with a 10% debt ratio.
Bay Street now has its man, Paul Martin in the big job. The prospects are for more blood on the tracks, accompanied by platitudes about the knowledge economy.
January 15, 2004
Blood on the Tracks: The Dubious Legacy of Deficit-Slayers Chrétien and Martin © V. T. Rowan, 2004
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