Monday, October 23, 2006

To save social programs, the debt must be repaid

There's an article in today's print edition of the Toronto National Post that says a record number of Canadians -- an overwhelming majority, in fact -- believe that debt retirement, not new social spending, should be where budget surpluses go. (Sorry, gang, I checked the site several times and it's not up on the website, not even behind the subscriber wall -- if I do find a link, I'll update this post.)

The argument made by social activists against paying down the debt is that as the economy grows, the size of the debt relative to the economy shrinks. Therefore, it's not really a problem; and we can just turn up the taps when it comes to social spending. With all due respect, I disagree that one automatically allows for the other. Yes, I do have a social conscience, but I am also a fiscal conservative; and it is from this perspective that I feel some points I've covered in the past need restating.

Canada has been on a tear for the last 13 years, no doubt about it. We'd had some extraordinary success as well as a bit of dumb luck. Exports of manufactured goods as well as non-renewable resouces is at a record high. Governments recognized the need to tackle the debt, and we took it on, even if it meant cutting back the public service and downloading costs to lower jurisdictions. It also helped that we had a relatively low currency in relation to the greenback.

However, the good times can't last forever, and all trends are pointing to a recession sometime in 2007 or 2008. The reason for this is the reckless spending of the US government. According to the Central Intelligence Agency, the US debt-to-GDP ratio in 2005 -- the last year with data available -- was up to 64.7%. Before 9/11, it was only about 42%. By comparison, Canada's debt-to-GDP ratio was 38.3% in 2005 and dropped further to 35.1% in 2006.

It's with the corresponding drop in debt that we've had a big drop in interest payments. We used to pay 33 cents on the dollar for debt servicing -- in other words, the interest. Now it's about 18. It's those savings that have allowed money to be put back into social programs; and while more should be done there, I believe debt retirement should continue.

If there is a recession, however, there will have to be some tough choices made as revenues drop. It'll be made worse by the fact that south of the border, there's no mood to cut spending or to deal with the huge unfunded liabilities of both Medicare and Social Security. If we're continuing to show prudence in spending, it'll bode well for investment and that should lessen somewhat the sting. Furthermore, we should be able to get the debt-to-GDP ratio to a self-financing level of about 25%. In a best case scenario, that could be in as little as four years; in a worst case, about ten -- but we'll still be light years ahead of the Americans. Plus, the employment insurance account as well as the trust funds for the CPP and the RRQ all have healthy surpluses and have been managed very well, and likely will be even with the baby boom collecting on their pensions, starting in 2011.

The bottom line is, we've worked hard to get where we are, and are well positioned to handle the coming storm. We shouldn't blow it by recklessly spending our way to oblivion like we nearly did just a decade ago. To protect our social programs, the debt must continue to be paid down. And we still have another $481 billion to go, even if it is Canadian money. The interest savings should enhance those programs. Only when the debt finances itself should we consider tax cuts -- and even then, surpluses should continue to be applied to the accumulated deficit until it is paid off all together. Then perhaps we can call in the US bonds we hold, put them into insolvency, and annex America. It'd be nice to have Florida and California -- in Canada.

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