On Government Finances and Debt

In Alberta Views this month, we have a debate column pair about government debt written by economist Trevor Tombe, and former PC finance minister Ted Morton.

There are a number of respects in which I find Morton's arguments are profoundly flawed, and I would like to take some time to address them in more depth than the relative brevity that the magazine format allows for.

On Budgets and Deficits In Alberta

Today was budget day in Alberta.  More or less, the NDP government brought in the budget that had been expected.  Continued spending on big ticket items that have been put off for years, if not decades.

Predictably both the PC and WildRose opposition parties are crying foul.  The argument is largely that "running up the debt" is a bad thing.  I'd agree ... but for a few small details that both parties are ignoring.  Decades of PC unwillingness to put money into infrastructure has left Alberta's infrastructure years behind where it needs to be.  Edmonton's Misericordia Hospital is apparently in horrible shape; The Tom Baker Cancer Centre in Calgary has been past capacity for years.  The SW Ring Road in Calgary is desperately needed, and there is a laundry list of infrastructure needed throughout the province.

But, the cry from Alberta's right wing politicians is "don't spend during a downturn!".  Let's look at for a minute.

In the short term, this is an ideal time for the government to invest in infrastructure.  Interest rates are still at record lows, material costs are down in some areas, and labour costs will be down compared to what they were at the height of the last boom.  From an investment standpoint, this fits the "low" part of the "buy low, sell high" maxim.  Let's face it, infrastructure is never cheap - it's an investment.

In particular, the Tom Baker replacement has been on the books since sometime in the mid-2000s, and successive PC governments have deferred it time and again on the basis that "now wasn't the time", or "we can't afford it".  This kind of parsimonious thinking pretty much means that anything bigger than a cartful of groceries gets turned into a political football.

The next argument from the political right is that by accruing debt, we are saddling our children with these costs.  This is a more debatable point.  While I certainly have objections to operational deficits (and the NDP deficit includes operational deficit as well as capital spending deficit), it is foolish in the extreme to look at government debt so simplistically.

First, we need to distinguish between operating deficit and capital expenditure related deficit.  Rutherford tried to structure the books to make this distinction, but the brain trust in the WildRose squawked about it as "deceitful", instead of understanding the difference.

An operational deficit is something you might tolerate for a brief period of time - a year or two perhaps before making changes to operations to change cost structures.  Businesses deal with this all the time using revolving lines of credit.  Most individuals do this in their daily lives using credit cards.  When times are hard, we do whatever we have to in order to finance the basics of life - food, clothing, and shelter in particular.  If we're between jobs, or working a job which isn't quite carrying us, we put money on our credit card, or borrow against our homes as a short term measure.  We know it's not great, but we do it.  Alberta has been in the teeth of a downturn which has only just started to show signs of having reached its bottom.  An operational deficit at this time isn't great, but it's not the end of the world either.

Capital expenditures are usually much larger, and need to be dealt with differently.  Buildings, roads, vehicles are all examples of capital expenditures.  Individually, we make these expenditures by borrowing to fund them, and we repay that loan over time.  Few of us have the luxury of being able to plunk down $500,000 to purchase a house, or even $25,000 to purchase a car.  We take out loans to finance this.  On the scale that governments operate, hospitals cost billions of dollars (The new cancer centre in Calgary is expected to cost $1,500,000,000 - a somewhat larger number than your average house purchase), as do the roadways in our cities and towns.  Water treatment systems cost millions, the networks of pipes to our homes are worth billions.  It is not unreasonable for the government to borrow funds for these kinds of expenditures.

In the post-WWII era, our parents and grandparents invested willingly and heavily in one of the biggest infrastructure projects in human history.  New roads were built, cities grew, hospitals were added, water and wastewater infrastructure grew enormously.  They willingly paid taxes to help build this infrastructure, and to operate it.  Even here in conservative Alberta, we undertook these projects. Governments funded them by borrowing - often using bond funds and other investment vehicles as well as loans (anybody else remember the Canada Savings Bond? - that was effectively the government borrowing from its citizens).  We didn't build those roads using money that was at hand - we borrowed to do it then.  We need to borrow to do the same thing now.

Successive PC governments were already running deficits in the years leading up to 2014 (peak boom I will point out).  That was the first clue that we have a revenue problem in the government.  When oil prices tanked, and with it government royalty revenues (which are tied to market prices), it became abundantly clear that the tax revenues available to the government were inadequate.  In response, the NDP government has taken steps to correct this, including introducing a carbon tax (I would have argued for a sales tax in preference, but in this province, that's going to take a level of political will that I don't think even the NDP has).

On the drive home this evening, I heard the PCs going on about how government tax revenues were "drying up because nobody is working", and "the tax regime is so burdensome that companies are fleeing Alberta".  Yes, the investment landscape is changing, and capital is drifting away from the oil sands.  But, it is debatable how much that has to do with taxation.  Tax rates overall are much lower than they were during holy days of Ralph Klein.  Companies don't "flee" because of relatively minor changes in the tax regime.  Companies like Shell, Exxon-Mobil and others have operations in regions where the tax burden is considerably higher than it is in Canada, so this argument doesn't make a lot of sense.  The PC argument was basically "we're going to cut all the taxes and restore our tax advantage" - an advantage which simply was illusory at best.  Employment won't magically happen - the issues aren't simply one of giving energy companies a tax holiday.

We also have to acknowledge that the Permian Basin discovery in Texas is going to attract a lot of development dollars that Alberta is competing for.  It is a much less expensive to exploit find than Alberta's oil sands.  Given the recent "buy American" stance of the newly minted Trump administration, one can imagine that the American based companies will be very interested in focusing their energies there.  This is a political reality which the government of Alberta has little or no influence over.  Practically speaking, it means that oil sands _expansion_ will be at a standstill for the time being.  However, given that we charge next to nothing for the production from an expansion project, I don't see this as a bad thing.

The WildRose and PCAA arguments on this front are ludicrous.  Alberta's population is now the 4th largest in Canada.  We can't operate as if we are a wealthy family living on a trust fund any more.  It's time for Alberta to grow up, and face the fiscal realities directly.  It is ironic that it has taken an NDP government to actually face that reality.

Flaherty's (mis)Adventures In Balanced Budget Land

Flaherty is expected to deliver an "optimistic" fiscal update report today, which will show the government tracking to achieve a "balanced budget" by 2015.  

Unlike last year's update which went down like a spoonful of cod-liver oil — tastes awful, but good for you — Flaherty has signalled he expects to report a better-than-projected deficit this fiscal year and a bigger surplus in 2015.As it turned out, last year's doom and gloom update, with its warning of a $6 billion hole in revenue intake and elevated global risks, never did pan out. Last month the government reported that it had beat its low bar for a $25.9 billion deficit by a tidy $7 billion — mostly because of government cost-cutting and stable revenues.

Hmmm...there's only one way that the government can reduce its deficit at the same time that it has taken billions out of the government's revenue stream in the form of tax cuts (2% reduction in the GST amounts to some $14 billion in revenues the government has forsaken, and who knows how much the Harperites have doled out in corporate welfare tax cuts - at least some $20 billion since 2006 ), and that's by making cuts which hurt the middle class in this country.

Make no mistake about it, not one of Harper's changes to Canada's tax system has benefited middle income Canadians.  There has been a very careful shell-game going on where the burden has been subtly shifted.  Sure, he throws you a bone - a few hundred dollars of GST per year, but then turns around and opens up the corporate tax system so that even more large corporations pay little or no tax.  What little money the government has left today is being funnelled into a massive military spending program at the expense of Canadian citizens.  (I don't need to point out that every one of those enormous purchases (F-35 fighter jets, new ships, Arctic bases etc.) is mired in difficulties because the military wasn't ready for the money and could not set up the programs to make these acquisitions fast enough.

Harper talks a good game (sort of) on tax cuts.  Riding on the coattails of Bush I and Reagan, he plays the "taxes are evil" card on a regular basis in his speeches.  He talks about "austerity" (which always ends up hurting the middle classes the most) as if it is some kind of magic pill.  It's not.  We know it's not.  When it comes down to it, Harper's economic policies are nothing more than Reaganomics re-imagined and cloaked in the justification of "economic crisis" that he has crafted by blithely shackling the government's ability to address issues by removing its funding.

Did Anybody Else See This Turd Coming?

I did. Way back in the 90s when King Ralph took away school boards' right to levy and collect property taxes.

It's taken a while, but sure enough the CBE takes some $10 million in deficit, and some 200 teachers are expected to lose their jobs as a result.

The problem? The provincial government has deliberately hamstrung regional school boards. First of all, the school boards are all funded by the provincial government, and they have no say in the amount of funding that Edmonton hands over.

It's pretty obvious to any thinking person that running the CBE is going to be a little more expensive than running the schools in the Crowsnest pass - at a minimum it costs more to live in Calgary than it does to live in Blairmore, therefore people demand higher salaries.

The second problem is that the province signed an agreement with Alberta's teachers - but it leaves the funding of those agreements in the hands of the school districts. So, on one hand, the government has placed a chokehold on the public school boards by committing them to employment terms and then tightens its grip by refusing to fund the school boards to meet their obligations - obligations which the province signed up to in the first place by signing those agreements.

That isn't just irresponsible governance, it's deliberate malice intended to undermine the public education system so that the privatization program that started with the introduction of so-called "Charter Schools" can be furthered.

Typically Short Sighted

One of the things that has always irritated me about the modern neoConservative is how utterly myopic their policies and solutions to things are.

In a time of economic crisis, which may well plunge Canada back into deficit territory, we find Jim Flaherty musing about selling off assets to balance the books.

How utterly short sighted. First off, given the economic situation, nobody's going to be able to borrow the money to purchase those assets. Second, at that point, the only way to sell them will be at fire sale prices, which hardly does justice to the taxpayer's investment, does it?

Lastly, a government, just like an individual, needs a balance of liquid and non-liquid assets. My house is an asset. I use it to my advantage by controlling my cost of living month to month; similarly, there is merit in the government owning a certain amount of 'bricks-and-mortar' to house its operations - in part so that the costs of the governments operations can be kept under some control - not terribly complicated to understand, is it?

Selling off Canada's assets to 'the highest bidder' simply to avoid a deficit is foolish. There are other ways to achieve that goal that do not have the same long term consequences for taxpayers.

Deficit Spending - Thoughts

With renewed speculation that the Federal government will run a deficit this year, I thought I'd spend a few moments discussing where I land on the subject - because it's not as cut and dried as "Deficit bad, Surplus good", as has been common mantra in recent years.

Let me start out with a review of the terminology - in part because here in Alberta, people have long since comingled the ideas of debt and deficit.

Debt: is the money that the government owes to various lenders from whom it has borrowed to finance various aspects of its operations. Sometimes, debt is a necessary thing - usually to finance assets which have a fairly long life (e.g. buildings, roads and other infrastructure) - paying that down over the first phase of the asset's life (before maintenance becomes an issue), is just fine - little different actually than the mortgage most of us carry on our homes for some period of time.

Deficit: is a different proposition. Deficits are what happens when the government borrows to finance its day to day operations. Probably the best way to look at a deficit is to consider it as similar to credit card spending. If you can pay the card off every month, you don't have much of a problem. Start carrying a balance, and suddenly you are compounding that balance into your overall Debt picture.

That doesn't mean that the credit card debt is necessarily bad. For example, your furnace in the house dies during a cold snap in the winter. It costs you a few thousand to replace it which you slap on the Credit Card to cover the cost now, and perhaps you flip the credit card balance to your Line of Credit at the bank at the end of the month, knowing that you just don't have that extra $4000 lying around to pay off the furnace.

Did you incur a deficit for that month? Yes. Did it compound your debt? Yes. However, it was also a necessary purchase to keep your home livable, right? That isn't such a bad thing. If, however, you are incurring a credit card balance every month because you are overspending on dinners out and going to movies, you have a more serious problem - because the costs will continue to occur unless you take specific steps to change your patterns.

Government has a somewhat trickier balance to maintain than most of us with a mortgage and a few credit cards. Government spending exists on multiple levels, and cannot simply be blindly cut without understanding what is being cut. For example, cutting EI spending dramatically during a downturn is actually a very destructive thing to do, especially during a time period when demand on that program will very likely escalate.

The challenge that the government faces in these times is deciding where cuts can be made with a minimal negative impact upon the citizenry of the country - you know - the same people that pay the taxes that fund government in the first place. So, how deeply do you cut before real damage is being done to the country? What is important to maintain, and what is simply an unnecessary burden on the country?

The balance is not trivial, although I suspect that the way the HarperCon$ are going, any cuts made will be excessively damaging not just to Canada, but to Canadians as individuals.

The finance minister will keep his post in the upcoming cabinet shuffle, insiders say, and they insist he remains hawkish on balanced budgets even if others are starting to resign themselves to red ink.

They say Flaherty has three ways to stay in the black.

The Tories can cut program spending. They can scale back future commitments - reducing the scope of the tax-free savings accounts created in the last federal budget, for instance. And they can freeze public service hiring.

There's an obvious area we could cut back our spending - Afghanistan. However, I doubt very much that Harper will do that. The typical neoCon line is all about making authority structures bigger, and more aggressive - whether that is the military, police or prisons.

Unfortunately for everyday Canadians that means that the Con$ will be going after the programs that benefit them on a day to day basis - health care, EI, and others that the Con$ typically argue are all about 'poor judgment' and 'individual irresponsibilty'.

A certain amount of deficit spending to keep important government functions and programs running is reasonable over the short term - especially when the world's economy is so volatile, and government revenues are therefore similarly unpredictable.

Using deficit spending as a club is neither productive, nor useful - unfortunately, I suspect that is exactly what we'll see in the House of Commons when it next convenes:

"(Harper) will be able to have a deficit and take no criticism for it. Who's going to criticize him for going into deficit when you get their buy-in first?"

A Conservative MP made it clear what political tack the government would take if forced back into the red. When asked whether he expected a deficit the MP smiled and replied: "Only if the opposition agrees."