Many people are worried, right now, about the unrest that seems to be tearing the US apart and that has boiled over into Canada, too.
Racism, in all its forms, is a problem here in Canada, there is no denying that. I’m an old white man ~ the devil incarnate to some youngsters ~ but I’m married to a wonderful lady who happens to be a so-called visible minority. Of course, back in her home country, I was the minority, and I was called the “ghost man,” and. a “devil” in the local language … and everyone who called me that knew I understood, too. I have watched, over the past 75 plus years, as minorities in Canada were able to move out of a few low-paid fields (farmhands, railway porters, laundry and small restaurant owners, always on the edge of bankruptcy) and now no one thinks its at all odd to visit a black dentist or an Asian bank manager or to be taught physics by someone of Indian ancestry. But racism does exist, right here, right now. It is wrong, and Justin Trudeau is right, we all need to do better.
But Canadian racism doesn’t scare me … Canada’s financial position does.
Dr Jack Mintz, who is the President’s Fellow of the School of Public Policy at the University of Calgary, writes in the Financial Post that “Canadian governments are lot more indebted than we think. And,” he adds, “I don’t just mean the vast add-ons now taking place and for coming years. No, what I mean is that the official public debt figures mask the true debt position of our governments. This can send the wrong signal to taxpayers that we are OK when we are not.“
He says that “The IMF reports that federal, provincial and local government net debt (assets deducted from liabilities) was only 26 per cent of GDP in 2019. By these numbers, Canada looks to be in good shape to weather the COVID crisis, with the 13th best net debt position among 35 advanced countries. (The best include Australia, the Scandinavian countries and Switzerland among others) … [but] … The IMF also forecasts our debt burden will rise to 40 per cent of GDP in 2020 on a national accounts basis. That’s not including new spending on post-secondary students and the elderly and other subsidies announced this past month — so expect the number to be even greater just for this year.“
But it is not as rosy as it seems. Dr Mintz says that “these net debt numbers suffer from some serious limitations,” and he warns that “we have entered a new phase of high indebtedness that we’re leaving for future generations.” That’s not new. I have been saying, fairly steadily, that our children and grandchildren and even our great-grandchildren will be paying off the Trudeau-Morneau debt for decades to come.
Jack Mintz list four major problems with our reckoning of the debt burden:
- “First,” he say, “national accounting (unlike the public accounting used in federal and provincial budgets) does not include government employee pension plan liabilities — the money we will all owe to retired civil servants that isn’t covered by a corresponding asset. Add at least another 15 per cent of GDP for this item to the 2019 debt load. Government pension liabilities will easily surpass that in 2020 as asset returns tank and discounted liabilities rise sharply because of low interest rates. (With lower interest rates it takes more money to cover a given future pension obligation.);
- Second, to get to net debt we subtract Canada and Quebec Pension Plan assets from our overall debt. But we ignore any liabilities these plans will pay out beyond one year. Unless governments renege on future CPP and QPP pension benefits, adding in these future obligations raises our 2019 net debt by another 14 per cent of GDP;
- Third, both financial and non-financial assets, like roads, bridges and other public capital, are carried at book value. But the 2020 market downturn means a government wishing to sell financial assets to avoid rolling over debt will have less money on its hands. Financial values generally do come back over time. But non-financial assets, of which over 90 per cent are held by provincial and local government, are a different, more troubling matter. They typically earn little financial return and are highly illiquid. If governments need money to cover debt repayments, their non-financial assets will have few buyers unless they are privatized at low prices. If we don’t follow the usual practice of subtracting non-financial assets from liabilities, the net debt burden would be higher by another 53 per cent; and
- Finally, “Governments also have major unfunded liabilities such as Old Age Security, Guaranteed Income Supplements, age-related tax credits, seniors’ drug plans, long-term care facilities and health care benefits. The IMF estimates that on its own unfunded health-care spending for the next 30 years adds up to another 42 per cent of GDP.“
I need to tell you that I am one of those people who have a government pension. I was a soldier for almost 37 years. I get a fair pension for my service. I contributed to my pension (7% of my pay comes to mind ~ that could be wrong) just as civil servants and Members of Parliament do to theirs. I also contributed to the Canada Penson Plan and, year-after-year-after-year to Employment Insurance, even though career soldiers, like me, could not draw it on retirement. Now, in my retirement, I get seniors’ drug benefits and so on, too. And I’m happy to have them, every little bit helps.
Here’s the problem: “Add it all up,” Professor Mintz says, “and Canada’s debt burden is $3.2 trillion. That’s 166 per cent of GDP — fully four times the IMF forecast for 2020.” Let me repeat that:
Canada’s debt burden is $3.2 trillion. That’s 166 per cent of GDP — fully four times the IMF forecast for 2020.
Despite budget deficits that were running too high before the pandemic, Finance Minister Bill Morneau kept telling us that our debt-to-GDP ratio was good, the lowest in the G7. Was he lying or are he and Dr Mintz just counting different things? It’s a bit of both, actually. The debt-to-GDP ratio is a useful measure, it tells you how much you can afford to borrow. You probably use a version of it whenever you consider renewing your mortgage or buying a new car. But when you consider buying a new car you don’t ignore the fact that you might have an existing car loan that will still need to be paid off. Jack Mintz is, in effect, accusing the government of ignoring some of its debts ~ those “unfunded liabilities” ~ when it calculates its capacity to borrow. And Profesor Mintz is not the only one to worry ~ the bond rating agencies, the people who help set the interest rates that we must pay on our public debts, are concerned, too.
Here’s how Dr Mintz explains it: “Financial liabilities require governments to pay interest every year. In 2019, our interest expense was $65 billion, about a quarter what we spend on health care. The 2020 deficits alone will add roughly another $3.5 billion in interest expense for federal and provincial governments, assuming low interest rates continue. As for other parts of net debt, such as public employee pension plans and growing public expenditures due to an aging population, more bond financing will be needed to cover these, as well — unless governments cut other spending or raise taxes … [there isn’t much discretionary spending, spending that is (politically) easy to cut, in our budgets, other then what we spend on foreign aid and national defence] … And that’s just 2020. It is unlikely we’ll get to a balanced budget for many years, given the public’s evident belief that governments have limitless cash. In fact, if things don’t improve by fall, still further spending will put us even deeper in the hole …[and, getting back tot he bond rating agencies] … Creditors eventually will want Canadian governments to have sustainable fiscal plans. If not, they will downgrade our debt, leading to higher interest rates. This has already happened to Alberta, which has the lowest debt-to-GDP ratio of all the provinces but also the second highest credit spread over Canada 10-year bonds. The most serious problems arise in countries that lose capital inflows, have falling currencies and can’t repay their international loans. That was Argentina this past week.” A few days ago I said that Justin Trudau was making Canada into “the Argentina of the North.” Is it just hyperbole? No. There are many countries that are rich in natural resources and have well educated, hard working populations and have failed or are failing, right now, because they are badly governed. Canada is not immune to that disease.
Professor Mintz concludes of a hopeful note: “We all hope economic recovery is in our future. It will come, though, only with a plan that restores Canada’s fiscal health.” That plan will not, I fear, ever come from the Trudeau Liberals. There are responsible Liberals out there, but most have been sidelined, many refused to even seek office in 2019. They need to act, soon, to dump Trudeau. Meanwhile, Canadians can do something ~ they can tell Prime Minister Trudeau and their local MP that they will not support the Liberal Party at the polls so long as Trudeau is its leader. They can tell the Liberal Party that they are going to vote Conservative or, if that is beyond their imagination, that they will vote Green or NDP … andythng but Liberal. Doing anything less that throwing the Liberals out means making Canada into a cold Argentina.