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A high price for paying debt
The Liberal government's obssession with reducing debt to GDP ratio is hurting development of social policy
LINDA MCQUAIG
How low should we go? That was the question on everyone's mind at a gathering in Montreal last year.
I'd like to tell you it was a gathering of world-class limbo dancers pondering where to set the bar, or a group of hotshot fashion designers contemplating what to do with necklines.
But I'll be honest: It was a conference of economists discussing what to do about debt reduction.
That may sound dull. Ottawa's Liberals are certainly hoping you'll think so and will tune the issue out.
As their budget revealed last week, they plan to go to the polls sometime soon insisting that the federal cupboard is bare, that they've searched high and low for money to pay for the social reinvestment Canadians apparently crave. But there just isn't any.
One reason for the apparent scarcity of funds is that the Liberals are planning to keep putting a massive $4 billion every year toward debt reduction.
That might sound sensible, but in fact there's no real reason to do this, and lots of compelling reasons not to do it.
It's part of the Liberal plan to bring our debt to GDP ratio down to 25 per cent (the size of our debt would then be 25 per cent of the size of our economy).
But it's worth asking whether getting our debt ratio down to 25 per cent will make any meaningful difference in our lives.
"The question is, when we reach that 25 per cent ratio, what will be the difference — will the angels sing ... will there be nirvana in the land?" asks economist Michael McCracken, CEO of the Ottawa-based economic forecasting firm Informetrica.
It probably won't make a tad of difference.
To begin with, the 25 per cent target is highly arbitrary. Even among the economists who gathered in Montreal last year, there was no consensus. Many of them thought that the ideal debt to gross domestic produc ratio would be about 45 or 50 per cent — close to our current level.
Hence the head scratching: How low should we go?
In fact, there's a danger of going too low, according to Lars Osberg, an economics professor at Dalhousie University, who participated in the Montreal conference.
Osberg explains that government debt offers risk-free investment possibilities for those, like pension funds, needing safe investments.
But the real danger isn't that we'll go too low. The real danger stems from the fact that so much public money — which could go to other things — is being needlessly directed to debt reduction.
Here's why it's needless: Even if we decided not to put another penny toward debt reduction, our debt to GDP ratio would continue to fall rapidly, simply because we are not adding any new debt and our economy keeps getting bigger each year.
In other words, the $4 billion Ottawa is putting annually into debt reduction is essentially gratuitous. Even without these payments, we'll soon achieve the 25 per cent target level (whatever that's worth).
By making these payments, we're simply speeding up the process — and only slightly; instead of waiting 11 years, we'll only have to wait 10 years before achieving this debt to GDP nirvana. This intense focus on speedily achieving what is at best an arbitrary target could simply be dismissed as obsessiveness, as needless macroeconomic navel-gazing — if it didn't have such dreadful costs, in human terms.
That $4 billion a year is desperately needed elsewhere.
McCracken estimates that if the $4 billion were instead invested in public programs — say, education, health care, child care — it would not only provide these services, but would create between 80,000 and 100,000 new jobs.
Proponents of debt reduction frequently argue that paying down the debt allows us to save on future interest payments.
True, but it's also true that investing wisely in public programs now creates economic benefits as well — benefits that are arguably larger.
Yet, apart from NDP leader Jack Layton, there have been few voices raised against Ottawa's misplaced obsession with debt reduction.
That has served the Liberals well.
As long as Canadians aren't paying attention or are lulled into believing debt reduction is essential, Ottawa can keep the lid on social spending — as the business community demands.
Certainly, there are plenty of business and media commentators backing up the Liberal claim that paying down the debt is essential, and that anything else is simply bad economics.
But some serious economists — like McCracken and Osberg — argue that letting the debt to GDP ratio decline on its own, without making multi-billion dollar annual payments, isn't bad economics at all.
"It's not even really economics," says Osberg, a former president of the Canadian Economics Association, "It's arithmetic, Grade 5 arithmetic."
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A high price for paying debt
The Liberal government's obssession with reducing debt to GDP ratio is hurting development of social policy
LINDA MCQUAIG
How low should we go? That was the question on everyone's mind at a gathering in Montreal last year.
I'd like to tell you it was a gathering of world-class limbo dancers pondering where to set the bar, or a group of hotshot fashion designers contemplating what to do with necklines.
But I'll be honest: It was a conference of economists discussing what to do about debt reduction.
That may sound dull. Ottawa's Liberals are certainly hoping you'll think so and will tune the issue out.
As their budget revealed last week, they plan to go to the polls sometime soon insisting that the federal cupboard is bare, that they've searched high and low for money to pay for the social reinvestment Canadians apparently crave. But there just isn't any.
One reason for the apparent scarcity of funds is that the Liberals are planning to keep putting a massive $4 billion every year toward debt reduction.
That might sound sensible, but in fact there's no real reason to do this, and lots of compelling reasons not to do it.
It's part of the Liberal plan to bring our debt to GDP ratio down to 25 per cent (the size of our debt would then be 25 per cent of the size of our economy).
But it's worth asking whether getting our debt ratio down to 25 per cent will make any meaningful difference in our lives.
"The question is, when we reach that 25 per cent ratio, what will be the difference — will the angels sing ... will there be nirvana in the land?" asks economist Michael McCracken, CEO of the Ottawa-based economic forecasting firm Informetrica.
It probably won't make a tad of difference.
To begin with, the 25 per cent target is highly arbitrary. Even among the economists who gathered in Montreal last year, there was no consensus. Many of them thought that the ideal debt to gross domestic produc ratio would be about 45 or 50 per cent — close to our current level.
Hence the head scratching: How low should we go?
In fact, there's a danger of going too low, according to Lars Osberg, an economics professor at Dalhousie University, who participated in the Montreal conference.
Osberg explains that government debt offers risk-free investment possibilities for those, like pension funds, needing safe investments.
But the real danger isn't that we'll go too low. The real danger stems from the fact that so much public money — which could go to other things — is being needlessly directed to debt reduction.
Here's why it's needless: Even if we decided not to put another penny toward debt reduction, our debt to GDP ratio would continue to fall rapidly, simply because we are not adding any new debt and our economy keeps getting bigger each year.
In other words, the $4 billion Ottawa is putting annually into debt reduction is essentially gratuitous. Even without these payments, we'll soon achieve the 25 per cent target level (whatever that's worth).
By making these payments, we're simply speeding up the process — and only slightly; instead of waiting 11 years, we'll only have to wait 10 years before achieving this debt to GDP nirvana. This intense focus on speedily achieving what is at best an arbitrary target could simply be dismissed as obsessiveness, as needless macroeconomic navel-gazing — if it didn't have such dreadful costs, in human terms.
That $4 billion a year is desperately needed elsewhere.
McCracken estimates that if the $4 billion were instead invested in public programs — say, education, health care, child care — it would not only provide these services, but would create between 80,000 and 100,000 new jobs.
Proponents of debt reduction frequently argue that paying down the debt allows us to save on future interest payments.
True, but it's also true that investing wisely in public programs now creates economic benefits as well — benefits that are arguably larger.
Yet, apart from NDP leader Jack Layton, there have been few voices raised against Ottawa's misplaced obsession with debt reduction.
That has served the Liberals well.
As long as Canadians aren't paying attention or are lulled into believing debt reduction is essential, Ottawa can keep the lid on social spending — as the business community demands.
Certainly, there are plenty of business and media commentators backing up the Liberal claim that paying down the debt is essential, and that anything else is simply bad economics.
But some serious economists — like McCracken and Osberg — argue that letting the debt to GDP ratio decline on its own, without making multi-billion dollar annual payments, isn't bad economics at all.
"It's not even really economics," says Osberg, a former president of the Canadian Economics Association, "It's arithmetic, Grade 5 arithmetic."
--------------------------------------------------------------------------------