Canada’s budget numbers are in, and the numbers are not what many had expected to see for 2014-15. The reaction from both the Liberal and NDP party leaders is equally as intriguing as the budget number itself, but we’ll get to that a little later.
Because who really cares about budget surpluses, deficits and government debt, anyway? It makes no difference and has no direct affect on the average, everyday Canadian, right?
Many people would agree with this statement, and for good reason – it is difficult to see in what tangible ways government debt has any affect on our daily lives.
This is precisely why many people don’t bat an eyelash when politicians tell them how much of their money they are going to spend on services, infrastructure and whatever else.
In the political world, political talk from the three major Canadian political parties has historically been the left-leaning parties talking of spending, and the right leaning emphasizing restraint, and balancing the budget.
On the current campaign trail, however, the NDP platform on the budget has shifted to the right, with Thomas Mulcair saying he will balance the budget ‘come hell or high water,’ which has upset many of his party’s supporters, who advocate for more spending on our country’s services.
When dealing with government debt, we must first look at deficits vs. surpluses.
In a nutshell, debt-to-GDP (gross domestic product) accumulates when a government runs a budgetary deficit. If the government spends more money on services than it garners from tax dollars (which is the government’s sources of revenue) it must basically print the money it needs (bills, notes, bonds) to pay for those services, thus posting a budget deficit and adding to its debt load.
A reasonable amount of debt-to-GDP is normal, and healthy to some extent. Developed countries can carry a certain amount of debt-to-GDP as long as it is sustainable and the country has the necessary GDP to continue paying down the debt.
This is similar to your average family. Most families carry a certain amount of debt, either from a mortgage, financing a car, paying for post-secondary education, or something else, and as long as that debt is not too high, and they are able to properly manage that debt and not let it eat up too much of their income, it’s fine.
After all, families and government have to support their dependants – governments must maintain services and infrastructure or their respective countries will provide a lower standard of life for its residents.
But family debt has a direct affect on an individual’s life – paying debt and not going out for dinner, saving for retirement, or going on a vacation, for example. But how does government debt have an affect on us?
A few ways – here are four:
1) Tax revenue starts being directed toward debt and/or interest payments, rather than needed and wanted services.
2) As the interest rate on securities rise, businesses in Canada are seen as being more risky, which in turn results in them increasing the price of their services and products to pay for their growing debt service. This increase is put directly on the consumer and leads to inflation (the sustained increase in the general price level of goods and services).
3) Mortgage rates go up, meaning home prices go down, so buyers can afford the higher interest rate of the mortgage itself. This means homeowners lose money on their investment, there home.
4) Taxes go up. Some people enjoy paying high taxes, but most do not. Most people around the world are fine paying a reasonable amount they feel is fair, but the higher a country is in debt, the more the government will take from its citizens to pay for that debt.
With the 2008 worldwide financial crisis, and several countries around the world struggling to dig themselves from the fiscal hole that created, we can see some of the above points hitting each of us, inflation in particular, as the cost of many goods and services has risen dramatically over the past seven years.
There really is no optimal percentage of debt-to-GDP a country should aim for, but typically once that number gets close to the 100 per cent range, trouble signs begin to arise. But there are many factors that go into how much trouble a country is in, including its economic growth, its plan for the future and whether there are buyers for that debt. Essentially, a low debt-to-GDP means a country can produce and sell enough goods to pay down their debt.
The country with the highest debt-to-GDP is Japan at 238 per cent, then Greece at 159 per cent (we all saw what happened to them) and Jamaica at 147 per cent.
The U.S. comes in at the 11th spot with 107 per cent, and Canada is 21st with a debt-to-GDP of 87 per cent.
So, how did Canada do with its 2014-15 budget?
We posted a $1.9 billion surplus during that time, which is in start contrast to the projected $2 billion deficit.
It ends six straight deficits from the Conservative government and comes a year before projected, just in time for the federal election…surprise, surprise.
But what is most entertaining is how this surplus has been spun on the campaign trail.
Liberal leader Justin Trudeau said the surplus was achieved only because the government ‘intentionally under spent’ and that the surplus was bad news for Canada.
NDP leader Mulcair said the $1.9 billion surplus was good news for his party’s spending plans.
Isn’t politics an amusing pastime?