Federal Government Debt

[Smallc]

And I generally hate nonsense.

Smallc, in this thread, I am defending a Left Wing point of view but you don't seem to realize it. You, OTOH, seem to be doing the opposite. You seem to favour more government spending but you want more balanced government budgets. You want to raise taxes? In a recession?

We're not in a recession anymore, and no, I don't want to raise taxes. I want Canada to be a place where people invest their money, and lower business taxes can help to bring that about. I want Canada to spend only money that it has during good times, and to pay down debt. As we go, we can lower taxes more, and increase spending above inflation where necessary. I said I don't like ideology, and then you tell me that you're defending an ideology that you think I have, and so I should like it.

On this, politically, Harper has probably more room to manoeuvre than Obama.

Harper has to rein in government spending and continue to make Canada more competitive. I'd like it if we could get back to surplus by 2013 - 2014, but we'll probably have to wait a year longer.

[Visionseeker]

When you refer to "theft by one generation from those that follow", what do you mean? The State is taking from some people and giving to others? The State does this all the time.

Wealth is redistributed through progressive taxation. But deficits and debt represent a lean against future earnings. In the context of government finiances, if a deficit is resolved in short order, no one gets hurt. But when deficits and cumulative debt are allowed to mount (as they did in the 70s and 80s), they defer responsibility for servicing and repayment on subsequent generations. As these subsequent generations cannot consent to the arrangement, the liabilities are imposed without consent and the outcome represents theft.

[August1991]

I want Canada to spend only money that it has during good times, and to pay down debt.

Smallc, that's good advice for individual Canadians but bad policy for Canada as a whole.

Smallc, you post this nonsense as a true Liberal. You repeat it, even though you don't practice it.

----

Paul Martin raised CPP/QPP contributions to almost 10% for income earners below $40,000. This is an awful and regressive payroll tax applied to employees. And what of EI deductions? Same story, and the money used to pay down the debt.

If fairness is the issue, and at this level I think it is, then we should not have such "taxes". No one earning less than $15,000 should suffer any deduction from their pay cheque. At most, I would make them pay a small tax when they vote.

[dre]

August you still dont seem to realize that both of those things ammount to the same thing.

Any debt that government takes on has to be maintained from the tax base. Defecit financing guarantees that more taxes will have to be collected in the future. And the greater the debt, the more of the Federal Budget goes to debt maintenance, and the more the government has to tax to fund its operation.

Perpetual defecits also cause "crowding out" of the loanable funds market and reduce the money available for private businesses and citizens to borrow. This puts downward pressure on consumption and expenditures by private business causing relative shrinkage in the economy.

Theres a place for defecit financing but it can also be very dangerous. Tell Greece that defecits dont scare you.

[August1991]

Wealth is redistributed through progressive taxation. But deficits and debt represent a lean against future earnings.

So, it's alright for the State to redistribute money now through "progressive taxation" but not to distribute "future earnings".

VS, you seem to see it as a sin if the government borrows. You prefer a government that pays its way. I can understand your logic when applied to your family but governments are not like you and me.

-----

Wait a second, a no debt family?

Did you ever borrow from your parents? I'm sure you did when you were first born and needed your mother's milk. Someone changed your diapers. And as an older child, you may also feed your parents in turn, or change their diaper. Borrowing and debt and repayment are the essence of families, and life.

I would not want a society of no debt at all. In fact, I prefer a society in which we owe much to our fellows. If voluntary, such a society is based on trust.

Perpetual defecits also cause "crowding out" of the loanable funds market and reduce the money available for private businesses and citizens to borrow.

A tax has the same effect. If you lend money to the government, or the government taxes you, you still don't have the money and so there is still "crowding out", as you put it.

In a Keynesian sense, it matters only whether the policy will have a greater effect on aggregate demand.

Tell Greece that defecits dont scare you.

Even in Greece, government deficits don't scare me - and the Canadian federal government is far, far from this.

I am scared by Greek (and Canadian) government spending. In western countries now, the State typically buys around 20% of GDP and transfers another 20%. These percentages have been rising slowly but inexorably. We are far from Keynes and the 1930s. Fiscal policy is different now since the State is so large.

Edited August 22, 2010 by August1991

[Smallc]

Smallc, that's good advice for individual Canadians but bad policy for Canada as a whole.

Smallc, you post this nonsense as a true Liberal. You repeat it, even though you don't practice it.

If fairness is the issue, and at this level I think it is, then we should not have such "taxes". No one earning less than $15,000 should suffer any deduction from their pay cheque. At most, I would make them pay a small tax when they vote.

You do know that people who make that little money are probably going to get all of it back (probably more than they paid) in taxes and CPP overpayment returns, right?

[Smallc]

A tax has the same effect. If you lend money to the government, or the government taxes you, you still don't have the money and so there is still "crowding out", as you put it.

I really don't think you're getting this. We spend over $30B a year just servicing our debt. That requires $30B more in tax, less in program spending, or some combination. If we had no debt, you and I would enjoy the benefits of that money.

[dre]

VS, you seem to see it as a sin if the government borrows. You prefer a government that pays its way. I can understand your logic when applied to your family but governments are not like you and me.

Actually a government faces the exact same issues regarding debt that families face. In both cases the more debt they carry, the more of their budget (Federal Budget VS Household Budget) has to go to debt maintenance. The US government for example has to pay roughly 375 BILLION dollars in interest on its national debt this year. Thats roughly ten percent of the federal budget and thats JUST interest. They could keep paying that 375 billion per year for a thousand years and the debt wouldnt shrink by even one dollar.

A government can fall into the exact same trap as a bored housewife thats addicted to the home shopping network. At some point you can reach a level of debt that its mathematically impossible to recover from, and you cant even make the interest payments on that debt so the principle at that point keeps growing even if you dont buy anything. Thats called BANKRUPTCY.

And just like that home shopping network addict the government can default on its obligations and get CUT OFF. Moodies rates the credit of sovereign debt holders in the exact same way equifax rates yours.

[August1991]

Actually a government faces the exact same issues regarding debt that families face.

A government is nothing like a family. Can you access your neighbour's Mastercard or her CIBC bank debit account and use either to pay for your grocery bill? To you, does it matter which of her cards you choose?

dre, imagine a world in which you could spend money that way, spend other people's money. I once lived in such a world when I worked for the federal government. I was so appalled that I walked away.

I was once Left Wing but I guess that I am now Right Wing. I saw the beast.

----

Government debt and government deficit are irrelevant. The only question is whether governments are spending more, or less.

As taxpayers, we are like soon-to-be ex-husbands. It doesn't matter whether she uses the credit card or debit card. It's still our money.

The key question is, "How much is she spending?"

Edited August 22, 2010 by August1991

[Yesterday]

IMO the Federal government should only have access to funding for military expenses. Above that the only money they get their hands on would be their paychecks. I would like to see the budgets and tax collections handled at a municipal level. Provincial level would handle the organizational affairs of things like hydro, healthcare and receive funding from the municipal level...municipal could cover all other infrasrtucture fronts. Area by area a yearly vote on tax collection and spenditure. Smaller groups defining needs...imagine how this could streamline expenditures.

[Smallc]

It could make expenditures far more, as there would be massive duplication of effort....also the constitution lays out the responsibilities of the different levels.

[Yesterday]

It could make expenditures far more, as there would be massive duplication of effort....also the constitution lays out the responsibilities of the different levels.

I think it could streamline things, I honestly think it would less of a task force to deal with each region independently. Much cheaper in the long run because of an ability to create a much smaller more connected level of bureaucracy. Really, all I am proposing is a responsibility shift. I think having our taxes solely collected on a municipal level puts the accountability for expenditure on a level of government we have actual access too. It could deal with all kinds of things like voter apathy, I would more inclined to vote on a tax budget for my municipality than for some remote Federal jackass that is so far removed from me that my opinion never even reaches their desk. Let someone who lives here run our financial show and commitments. Personally, we could shrink a lot of Federal offices if we did this and replace them with half as many placed where they can be effective.

I would like to see our municipal government get every penny of tax collected from every one of it's constituents. I would like to see our Mayor dole out welfare, health care, roads and maintenance, everything our tax dollars need to pay for. A yearly budget referendum, most people would vote in this context. I'd like to see how it would pan out financially, I would like our Mayor to have the option to reduce income tax on its constituents if possible because of good fiscal budgeting.

There are times when concentrating remote leadership definitely helps to reduce redundancy but sometimes it can also cause a waste. Especially when the leaders are so far removed from what they are deciding about. Sometimes the big picture leaves out too many small details.

Are there any templates out there that either describe a system built in reverse like this or show an actual society that did this?

Edited August 23, 2010 by Yesterday

[Visionseeker]

You can steal from your children, but don't blame the government if you do.

When you refer to "theft by one generation from those that follow", what do you mean? The State is taking from some people and giving to others? The State does this all the time.

Yes, wealth is redistributed by the state all the time. But redistribution among the present electorate is markedly different than redistributing by taking from tomorrow's electorate. The former can politically mobilize if they're opposed to the redistribution and defeat the government (i.e. hold it to account); the latter has no power to consent or reject the approach and therefore represents exploitation of the vulnerable... theft.

No one, not even the State, has the power to steal from the future and give to the present.

When governments forgo raising taxes to counter revenue shortfalls and opt instead to absorb the gap with debt, they are explicitly relieving current taxpayers from paying for that which they consumed. Using this approach for small sums or to occasionally absorb a massive shock is a legitimate.

But both the federal and provincial governments were addicted to debt in the 70s and 80s because the provinces exploited the 50-50 funding formula for the nation's social programs. For 20 years, all levels of government spent more than they earned and debt servicing payments became an ever increasing expenditure in government budgets. The cumulative debt they left to those who came of voting age in the 90's meant that 1 of every 4 dollars they paid in taxes went to paying-off 20 years of tax avoidance.

The country effectively stole from Generation X and the others that follow.

There is one way the present could steal from the future. We could leave the future a polluted world. Of course, the future will inherit with luck from the past, at no cost to the future, alot of accumulated knowledge - including perhaps ways to deal with pollution. (Think of how much knowledge we inherited from the past - at no cost to us.)

Inherited knowledge? I think understand what you are trying to say, but knowledge isn't inherited; it is gain primarily through formal education. I don't know about you but I paid handsomely for mine (and was still paying for it up to 5 years ago). Nevertheless, preceding generations do make discoveries and advances the ultimately benefit the generations that follow. But that holds true for each and every generation so it's a fool’s errand to suggest that this can legitimize a crippling fiscal legacy.

[Visionseeker]

On the contrary, the purpose is to use fiscal policy to overcome ineffective monetary policy. So, the government wants quick, immediate action.

Well, that's what they want you to believe even though they know it isn't true. The massive expenditure in a single year approach is simply a facile exercise in appearing to do something about a problem at the expense of effectively accomplishing something.

Frankly in this macro context, if I had been Obama or Harper, I would have gone with a mix of major tax cuts and modest, focussed increases in government spending. (Did I just post that?)

If the purpose is to press a reset button to get the economy moving, I wouldn't "cut" taxes. I'd increase them while providing handsome tax incentives for specific behaviors which benefit re-investment (carrot AND stick). The increase in government spending would be phased over 3 to four years with the first year addressing "shovel ready" projects and re-tooling dormant plants, the second year for building the institutions needed for "tomorrow" - not prisons, but long-term care facilities to meet the needs of our aging population; year three would incompass massive investments in the fruits of successful labours born-out of the tax incentives mentioned above, and year four would address the infrastructure needs deriving from year three's endeavours.

[Visionseeker]

How? It makes sense for you as an individual to pay off your debts. But we as Canadians collectively will always have debts and it would be absurd/harmful if a government aimed to eliminate debt in Canada. This is called the fallacy of composition.

It's interesting that you bring up the Fallacy of Composition, because I've often considered that your position on fiscal matters may suffer from it.

My example above is perhaps easier to understand. If you have a mortgage (and most Canadians do), and if you win a small lottery, you can pay use the lottery money to pay off your mortgage - or you can spend the lottery money on a world cruise with the hubby. When all is said and done, only your children will notice the difference.

The children won't notice the difference as they will not have the benefit of experiencing the consequences of both scenarios. They will only know the reality that follows from the choice that the parents made.

When you die, how much money do you plan to leave to your children in your will? In discussions of government debt, this strikes me as the key question... Canada is a very rich country. There are millions of Canadians about to leave millions to their children. Some will leave more than others.

There are indeed some elderly Canadians who will oblige and die before they've spent the bulk of their life savings, but these are the exception. The reality is that most existing retirees are living much longer than they thought they would and are spending greater and greater shares of what they thought they were leaving for their kids to inherit. They are also placing greater demands on the healthcare system in presenting repeated life-threatening and non-life-threatening ailments requiring care and attention well beyond that which is demanded by their earlier dying peers. Furthermore, a huge proportion of the soon to reach retirement age haven't put away enough to sustain their present standard of living for more than 3 years.

In this context, the country faces two daunting challenges in the coming decades:

1- the affordability of universal public health care in the context of consumption supporting increasing longevity

2- how to address increasing levels of poverty among the nation's senior citizens?

Both of these challenges demand that we rationalize government expenditures and reduce present debt to create fiscal robustness in anticipation of the coming storm.

[Visionseeker]

So, it's alright for the State to redistribute money now through "progressive taxation" but not to distribute "future earnings".

The short answer is no. But I leave some latitude for fiscal maneuvers designed to avoid a greater harm. On the whole though, government debt should not exceed annual revenue unless the debt accrued demonstrably invests for a significant return.

VS, you seem to see it as a sin if the government borrows. You prefer a government that pays its way. I can understand your logic when applied to your family but governments are not like you and me.

It is not a sin. I submit that deficit financing is sometimes necessary but should otherwise be avoided.

Wait a second, a no debt family?

Did you ever borrow from your parents?

Nope. The old man died my first year of CEGEP and I paid the mortgage and delayed going to university until the house was sold.

I'm sure you did when you were first born and needed your mother's milk. Someone changed your diapers. And as an older child, you may also feed your parents in turn, or change their diaper. Borrowing and debt and repayment are the essence of families, and life.

Ah, debt is some kind of original sin I see.

Parents owe an obligation to nurture those they bring into the world. As much as they would like it to be, the relationship is not necessarily reciprocal. Yes, I cared for my mother when she was dying (my father died suddenly). But I did not do so because she was simply my mother, I did so because she was an excellent mother. She was also a good person whom if I'd been aquinted by though some other connection, would've received the same care and attention.

The role of love and affection is precisely what undermines the behavior of the state from that of members of a family. It is not a parent's financial commitment but their emotional commitment that produces reciprocity and, even so, the commodity exchanged is not monetary, it's love.

I would not want a society of no debt at all. In fact, I prefer a society in which we owe much to our fellows. If voluntary, such a society is based on trust.

I think you are confusing debt with obligation. Debts are obligations, but there are also obligations that are not born from indebtedness.

[PIK]

Situational deficits are arguably a reasonable fiscal mechanism when the times call for one, but structural deficits are nothing more than theft by one generation from those that follow.

I agree with the notion of active fiscal policy but cannot fathom why governments insist on "blow-a-load in a year" approaches. It is much better to spread larger commitments over a longer horizon (3 to 4 years) than to cram a near overdose of stimuli inside a single year. In fact, I hate the "stimulus" moniker because it minimizes the objective to an act of spending as opposed to investing. It's as if the goal is to spend with little to no expectations of enduring results. Like building gazebos off county roads in Huntsville!!!

Harper's GST cut is meaningless to 80% of consumers while significant in terms of bringing the federal government into a structural deficit situation. It was, is, and shall always remain a stupid fiscal policy decision.

That 2% help out alot of people ,some poor people do not pay much income tax as the rest so really a income tax does not realy help them ,but 2% cut on all purchases does.

[Smallc]

That 2% help out alot of people ,some poor people do not pay much income tax as the rest so really a income tax does not realy help them ,but 2% cut on all purchases does.

Poor people get the money back anyway.

[Visionseeker]

That 2% help out alot of people ,some poor people do not pay much income tax as the rest so really a income tax does not realy help them ,but 2% cut on all purchases does.

Not all purchases are subject to GST. Food, rent, child care, prescription drugs, dentistry, and ABM fees are exempt. These basic expenditures consume the bulk of income for the poor. Of that which remains, the 2% GST deduction nets them between $60 and $80 dollars in savings in a year.

By contrast, a reduction of the basic tax rate to 14% would yield $250-$300 in savings for such households.

But this is besides the point. The 2% reduction in the GST deprives the federal government of 8% of its prior revenue stream. Can you take an unpaid month off of work and still meet your financial obligations?

[August1991]

There are indeed some elderly Canadians who will oblige and die before they've spent the bulk of their life savings, but these are the exception.

I'm going to stop you here, VS, because my argument critically turns on this point.

Canadians who die with no assets are the exception, not the rule. Take a look at this graph: Link

You can also look around you and realize that Canada has alot of physical and intellectual capital and in general, we are adding to the net wealth of Canada. Somebody in the future will own it so if you don't inherit a share of this wealth from your parents, somebody else will.

Nope. The old man died my first year of CEGEP and I paid the mortgage and delayed going to university until the house was sold.

Not to get personal about this but I assume there was some equity in the house that he left you. Edited August 24, 2010 by August1991

[Visionseeker]

I'm going to stop you here, VS, because my argument critically turns on this point.

Canadians who die with no assets are the exception, not the rule. Take a look at this graph: Link

You have no idea how much I appreciate your raising this discussion to the level of facts.

The national picture looked very cozy in 2005. But I invite you to look at the graph for wealth by age only four tables below.

Link

Note how median net worth drops 25% from cohort 55-64 to cohort 65+ from $407,417 to $303,167. There are a number of factors that could explain this:

1- The current 65+ cohort may have traditionally had a lower net worth than the generation following it.

2- The 65+ cohort has been depleting their net worth during their retirement.

3- The current 55-64 cohort's net worth has been boosted through inheritance from former 65+ cohorts who have since died.

4- The current 65+ cohort may have used safer, lower yield investments to house their retirement savings while the 55-64 cohort may have continued to play the wider market

5- The current 65+ cohort's primary asset (home) sits in a less lucrative/volatile community than the current 55-64 cohorts.

In fact, each of these explanations stands as true to varying degrees. What is important to note is that, on average, the 65+ group held 25% less wealth than their 3 to 4 surviving children and that each day the live, the gap grows larger and the inheritance smaller.

Another matter to consider is that net worth has taken a beating since 2005 when the TSX stood at roughly 10,700. It closed today at 11,557.35. This anemic increase of 7.7% over 5 years is more than over taken by inflation. So on average, those who've simply held the course since 2005 have witnessed loss, not growth in their portfolios. But in reality, most investors realized losses between the summer of 08 and spring of 09. Their real position likely sits at 8-10% less than it was it 2005.

Lastly, home prices figure heavily in the relative net worth of all cohorts. Housing markets in Canada have been mixed since the financial crisis began, but are beginning to show a generalized decline in prices outside major markets and, in some case, within major markets.

Housing markets

"The slowdown has been most dramatic in Canada. Average home prices in Q2 were up just 6.8% y/y,

compared with 16.6% y/y in Q1. Sales, while still at a high level, have trended steadily lower alongside

reduced affordability and exhausted pent-up demand. Meanwhile, increased listings are tilting overall

market conditions back in favour of buyers. We expect demand to remain at a lower ebb into next year,

and prices on average to be roughly flat."

You can also look around you and realize that Canada has alot of physical and intellectual capital and in general, we are adding to the net wealth of Canada. Somebody in the future will own it so if you don't inherit a share of this wealth from your parents, somebody else will.

My point is that fewer and fewer will inherit and those that do will inherit much less than "expected".

Not to get personal about this but I assume there was some equity in the house that he left you.

Hey, I opened the door so there's no need to be coy. There was equity when we sold the house, and my mom was able to use it to start a new life. I got nothing out of the equation nor did I expect to. When Dad died, mom cut cheques to his clinic staff for 3 months work and afterwards learned that he had borrowed against his life insurance to pay salaries while he was sick. Neither of the 2 doctors with "rights" to the clinic paid a penny to the staff and simply shunted patients to their own practice from the moment dad "temporarily" closed his practice.

As a side bar, 8 years ago I learned that the wife of one of the doctors my dad employed had run-off with his accountant and managed to spend the entirety of his savings. I drove to Montreal that night, rang his bell and when he answered the door I quietly said "shadenfruede", turned around and drove home. When I got home, my cheeks were sore from smiling the entire drive.

Edited August 25, 2010 by Visionseeker

[Yesterday]

I think it could streamline things, I honestly think it would less of a task force to deal with each region independently. Much cheaper in the long run because of an ability to create a much smaller more connected level of bureaucracy. Really, all I am proposing is a responsibility shift. I think having our taxes solely collected on a municipal level puts the accountability for expenditure on a level of government we have actual access too. It could deal with all kinds of things like voter apathy, I would more inclined to vote on a tax budget for my municipality than for some remote Federal jackass that is so far removed from me that my opinion never even reaches their desk. Let someone who lives here run our financial show and commitments. Personally, we could shrink a lot of Federal offices if we did this and replace them with half as many placed where they can be effective.

I would like to see our municipal government get every penny of tax collected from every one of it's constituents. I would like to see our Mayor dole out welfare, health care, roads and maintenance, everything our tax dollars need to pay for. A yearly budget referendum, most people would vote in this context. I'd like to see how it would pan out financially, I would like our Mayor to have the option to reduce income tax on its constituents if possible because of good fiscal budgeting.

There are times when concentrating remote leadership definitely helps to reduce redundancy but sometimes it can also cause a waste. Especially when the leaders are so far removed from what they are deciding about. Sometimes the big picture leaves out too many small details.

Are there any templates out there that either describe a system built in reverse like this or show an actual society that did this?

One way to facilitate this could be to establish a board of directors of both municipal government officials and residents who manage a foundation of local businesses that generate revenue geared towards running the county. I would like to see enough revenue generation to replace both federal and provincial funding at the municipal level. I would like to see the amount of tax collected from my municipality that is used to generate said funding collected at the municipal level and used thus. I would like to see hydro initiatives across Canada in every municipality that could sustain themselves off grid and the hydro revenues again collected municipally and used thus. I would like to see the political flexibility that would allow for alternatives such as this. Personally, I believe a society less geared to being financially dependant on federal and provincial handouts with a municipal government equipped to take care of it's county could be much more accessible and transparent. Revenue generation alone from the released taxes and hydro generation (depending on consumption requirements) in smaller communities meets and exceeds existing funding. When I consider my home county in NS with 11,000 residents in terms of budgets/spending control and funding, when I apply this concept, there is more than enough money to take care of all the existing gaps in senior housing, health care, roads and maintenance, education, local food aid and relief. It shows potential for serious improvements of standards of living and green initiatives. Shows major promise for long term tax cuts at our municipal level for the county residents.

The reality of the dispersion of Canadian communities, as much as 2/3 of our land consists of perfect areas to apply this type of municipal structure.

PS On a different note, the little political test labeled me as a centrist. I do sound like a centrist. Maybe finally I am on the way to being able to put an accurate political definition of myself on the table.

Edited August 25, 2010 by Yesterday