Heading down the debt path again
Gwyn MorganEconomy General Government Manufacturing Bill Morneau debt deficit manufacturing
The federal government’s planned $30-billion budget deficit, to be followed by three more deficits totalling $113 billion, brings to mind former US Secretary of State Henry Kissinger’s observation: “It’s not often that nations learn from the past, even rarer that they draw the correct conclusions from it.”
The budget deficit is triple the “modest” and declining $10-billion deficit promised by Prime Minister Justin Trudeau during last year’s election campaign.
Likewise in 1970, Trudeau’s father Pierre forecast a “minimal” $5-billion federal deficit. That was followed by a dozen years of out-of-control spending that drove the deficit to over $32 billion and saw the national debt balloon by more than 700%. Canada’s prime lending rate reached an incredible 22%, causing a great many personal and business bankruptcies while collapsing private investment. Sky-high interest rates drove up the cost of servicing that national debt, spawning even higher deficits.
Canada, once one of the world’s strongest nations financially, was transformed into an economic basket case.
Ottawa would implement 27 consecutive annual deficit budgets before tough spending cuts stabilized and eventually reduced our country’s debt burden.
Today, our national debt stands at $617 billion and Finance Minister Bill Morneau’s recent deficit forecast would take that to $730 billion by 2021. Even with today’s record low interest rates, debt servicing will eat up $26 billion this fiscal year. If interest rates were to rise by a modest 2%, the cost of servicing that increased debt would rise to more than $44 billion by 2021, leaving the next government with no choice but to run even higher deficits or slash program spending.
Okay, so taking on more national debt is risky, but isn’t it true that deficit spending is necessary during times of economic difficulty? And doesn’t economic growth eventually make it easier to balance the budget and pay down the debt?
Answering the first question requires defining “economic difficulty.” The Conservative government, along with virtually every other government in the developed world, ran large deficits in response to the 2007-08 global financial crisis. Fortunately, a series of previous budget surpluses lowered the national debt, placing Canada in the strongest financial position of any G7 country to implement stimulus spending.
The moral of the story is that governments should keep their financial powder dry and only run deficits when the economic need is both imperative and temporary. The current period of low growth doesn’t come anywhere close to meeting the criteria. And what if this low growth period is not a temporary situation?
There’s good reason to believe that lower growth will be the new normal. Demographics alone make this highly likely. The boomer bubble is greying, with profound implications on labour force growth, the No. 1 driver of economic growth in almost every country.
Statistics Canada forecasts labour force growth will slow to just 0.5% per year during the term of the federal government. Some 250,000 baby boomers are retiring each year. Soon that number will grow to 400,000. This will have a profound impact as a smaller pool of working-age taxpayers must fund the rising health care and social costs of a burgeoning population of seniors.
And if the Liberals remain focused on trying to grow the economy through government spending, rather than policies that encourage private sector wealth creation, the chances of a rebound in growth will be very unlikely indeed.
Running up the national debt in the face of these realities means handing the next generation a massive debt burden.
Some of that next generation are uniting to fight against that legacy. Generation Screwed is a movement made up mainly of millennials (born from the early 1980s to the mid 1990s).
Their website opens with “Past generations voted to spend more and more money expanding entitlements and the size of government. They are handing the next generation the bill.” The website includes a link to a “How screwed are you?” map that shows combined federal and provincial debt per person depending on where you live.
I met some of these young anti-debt activists during a recent trip to Ottawa. One of them said to me, “Parents try to leave their kids some money. Governments will leave us nothing but debt.”
Ironically, it was their millennial cohorts who helped elect the government that will make that debilitating legacy a lot larger.
Gwyn Morgan is the retired founding CEO of EnCana Corp.