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Friday, November 25, 2011

Time to put Canada’s house in order

With the economic crisis in Europe going full bore, one might expect we’d have near unanimity around the idea that Canada and its provinces should get their houses in order and begin addressing public debt. Instead we continue to hear the call for more economic stimulus.

Granted, Canada’s debt at the national level is not close to that of the worst European nations in terms of percentage of GDP. It is, however, growing at a concerning rate and will consume a significant percentage of annual budgets once interest rates return to historical levels. And this could come sooner than many think as investors around the world are already beginning to drive up borrowing costs for indebted governments—Germany this week managed to attract bids for only 65% of the 10-year bonds it offered for sale.

If not now, then when should we get our spending under control, and by that I mean limiting spending increases to a level at or below the annual rate of inflation and trimming government programs and initiatives that are not a priority or do nothing for the economy. And we need to cut spending enough to generate a budget surplus that we can apply against the debt.

Time is of the essence. The next economic crisis could come at any time, requiring temporary deficit budgeting. By lowering our debt now, we will create room to make future deficits manageable and thereby avoid the mess they’ve created for themselves in Southern Europe.

The situation in Quebec seems most worrying of all, with Ontario not so far behind. Quebec has the highest debt burden in the country, a staggering 61.7% of its gross domestic product—according to an Oct. 7 estimate by debt rating agency DBRS Ltd. Ontario’s debt ratio is not as high, but at 37.2% it will quickly become unmanageable with annual double-digit billion-dollar deficits piling one on top of another.

Quebec is playing a dangerous game by ignoring the time-bomb that is its debt. Perhaps Premier Jean Charest expects the rest of Canada to rescue his province should they be unable to handle debt repayments at some future time. Charest could have pledged the $2-billion windfall his province will receive from Ottawa for their recently announced tax-harmonization deal directly as a debt reduction. He has, instead, used this “found” money to avoid having to make spending cuts.

The Quebec government may not be oblivious to its fiscal situation, but it seems reluctant to make tangible moves to address it. Take, for example, their $7-a-day daycare program. Does this not say all one needs to know about that province’s head-in-the-sand approach to economics?

© Russell G. Campbell, 2011

5 comments — This is a moderated blog and comments will appear when approved. Please don’t resubmit if your comment doesn’t appear immediately, and please do not post material that is obscene, harassing, defamatory, or otherwise objectionable.

  1. If we had a Government that would draw up a list; "Want vs need" and everything on the want column was cut of from government spending until the world settles down. Then and only then would I feel comfortable.
    What will probably happen is an across the board 5% cut which is political chicanery.
    I'm not optimistic we have the courage to do what we should be doing.

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  2. I don't get it. You use extreme language about debt and yet you support Stephen sharper. Harper inherited balanced books and promised in the 2008 election to never run a deficit. Then he ran the largest deficits in history. Makes one miss the fiscal discipline of Paul Martin.

    If you don't hold Harper accountable then you'll get the same out of control spending.

    Economic Action Plan= Debt

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  3. I agree, Melvin, we lack the political courage to do what's necessary… let's hope we don't regret it.

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  4. Low hanging fruit:

    Crown Corporations; $8 billion/year
    Subsidies to corporations: $30 billion/year
    Pay differential between public and private sector workers doing the same jobs: $19 billion/year

    Look how far we could get with just these three items.

    Cutting departments and programs that overlap with Provincial responsibilities under the BNA would save several billion (if not tens of billions), and cutting transfers to Provinces would save $46 billion/year.

    At this point we are not just cutting the deficit, but paying down the debt. Deep, broad based tax cuts will also help; consider that Mike Harris was seeing an increase in Provincial revenues of $20 billion by the end of his term in office (despite cuts of transfer payments by Ottawa and no offsetting spending cuts). If broad based Federal tax cuts provided an average of $5 billion/year from each province, then we have eliminated the deficit and cutting @ $20 billion/year from the national debt.

    It is doable, if we prod the politicians to do so.

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  5. Tax cuts the solution of the lazy mind!

    While I I agree with the RC that the situation in Quebec is precarious, one should take into consideration that all Quebec "crown" corporations debt is included here, and Hydro Quebec is a big number for that total (probably more efficient that Ontario's Green energy give away).

    However, on your general point you are absolutely correct that Quebec has a problem, that is fast becoming unmanageable.

    One issue is that Quebec wants the same services as Ontario, but the province is much poorer than Ontario -- no doubt the exodus of head offices after the election of the PQ had something to do with it, but the sources of the problem is irrelevant, they are there.

    You are correct that $7/day daycare is a massive problem (and cost) but so is Quebec's subsidized medication programs, or its cheap universities.

    However, the population loves the freebies -- and are always keen for "others" to pay. There were some moves by certain politicians to take action, but it takes determination, strong will and and willingness to lose one's job....these politicians are few and far between.

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