Iggyâ€™s Deficit Wall
I just saw Michael Ignatieff on TV warning that Canada could hit â€œthe deficit wall.â€ I assume he means â€œdebt wall.â€ (I would not fault a slip of the tongue, but the written text of a recent speech also incorrectly calls it â€œthe deficit wall.â€)
The concept is not that a country hits the wall because a particular annual deficit is too high. The fear is that, if a governmentâ€™s accumulated debt grows too large relative to its potential tax base, lenders will stop buying its bonds. Therefore, the relevant measure is the ratio of public debt to national economic output (Gross Domestic Product).
The last time Canada supposedly came close to hitting the wall was in the mid-1990s, when federal debt peaked at 68% of GDP. (Using a somewhat broader definition of debt than Finance Canada, the OECD calculates a peak of 71%.) There was important debate about the alleged proximity of the debt wall even then, but this recent peak still provides a useful benchmark.
At the end of the last fiscal year, the federal debt was only 29% of GDP. Septemberâ€™s Fiscal Update projects that, by 2014-15, debt and GDP will expand to $628 billion and almost $2 trillion respectively. In other words, the federal debt-GDP ratio will be 32%, less than half the level reached in the mid-1990s.
Of course, a key Liberal theme is not trusting Conservative numbers. (While scepticism of government fiscal projections is completely warranted, it also conveniently allows Ignatieff to avoid stating whatÂ budgetary changes he would make.)
However, alarm about hitting the wall is inane even given completely different fiscal assumptions. Statistics Canada reports that GDP is currently running at an annualized rate of $1.5 trillion. Assuming no economic growth and no inflation, the debt would still need to surge above $1 trillion to reach 68% of GDP.
To increase the federal debt from last yearâ€™s total of $464 billion to above $1 trillion would require annual deficits of $56 billion not only this year (as projected), but also for nine more years. In other words, getting within hailing distance of the debt wall would take a whole decade without any economic growth, inflation or deficit-reduction.
Even these incredibly pessimistic assumptions reveal that the federal government has ample room to increase public investments and expenditures without getting into fiscal trouble. The Official Opposition should criticize the government for failing to invest and spend enough in response to the economic crisis, rather than for approaching a mythical â€œdeficit wall.â€
However, the official opposition leader is a neoliberal believer, and thus needs to stroke public hysteria with fear of “killing zoo animals” and that the only way is to vote liberal, and often.
And after the liberals won in 1993 on a campaign of “jobs, jobs, jobs” and a very progressive platform, the libs successfully tricked the public in “we hit the debt wall” in order to restructure our national economy to fit with neoliberal global capitalism dictate.
So yes, him saying we hit the deficit wall, is a mis-speak but setting up for the cuts is where this group is that. That’s the do better part I suppose.
OK, I agree with Erin’s assessment that we’re not near a state where people are going to stop lending to us, but I’m not sold that we should “criticize the government for failing to invest and spend enough in response to the economic crisis.”
How do we determine what “enough” spending is? Should the government keep spending until people stop lending to it?
This all just populist posturing. The liberals will continue to pledge balanced budgets and no tax increases. If they get into government they will raise taxes. This will be facilitated by the fact that the US should be going into a higher tax regime. Anyone remember the populist liberal red book? We have all watched this film before.
As per your observation Erin this line of balanced budgets and no tax increases also means that the liberals won’t be forced to talk about which kinds of taxes will be raised.
I have to admit, balancing the budget talk is about the last thing we need to hear right now.
First off, as Erin mentions, there is plenty of room for the govt to respond to the continuing crisis with more and targeted stimulus.
Sedond, there is a growing talk in the US that Obama might be considering more stimulus- which is quite contrary to balanced budget talk.
So how do we interpret Iggy.
1- lost in space and no real clue about where we are going economically
2- as Travis mentions, he is merely pandering to a targeted tory voting group
3- is secretly a cunning strategist and has outsmarted us progressive economists and actually knows a pathway through the crisis that included notions of balanced budgets????
4) both 1) and 2)
5) none of the above
In my opinion, governments should not be running persistent deficits now so that they can better deal with the pending demographic challenges in future. Governments throughout the developed world will likely have to run large and persistent deficits to deal with health care and social security for the increasingly elderly population. We could be saving for that need now, but aren’t. Just the opposite in fact.
I am all for short-term Keynesian-style fiscal stabilization measures, but only so long as they work in reverse too (i.e. running surpluses in good times, not giving it all away in silly tax guts like the GST example). Running these sorts of deficits now means the fiscal crunch 10-20 years out is going to be that much worse.
It is a textbook case of inter-generational transfer of wealth, and its not surprising that politicians are siding with the current generation.
From what I heard this weekend the liberals think they have no more than six months before the economy and the job market picks-up to a noticeable degree. So I suspect with this genuinely held rosy vision of the future they think that they can just grow the deficit away.
I tried to point out that in the last IMF survey of economic forecasts that something like 93 percent missed calling the recession and once the recession was apparent vastly underestimated its severity. This study did *not* include the last recession.
Deficit phobia and its associated debt wall phobia have been used effectively by neo-conservatives for more than 15 years to deflect demands for better EI, support of all kinds for the disadvantaged, public Pharmacare, etc. In today’s world of greatly deficient aggregate demand it is profoundly dishonest to evoke the need for future cutbacks. Even within the limited confines of mainstream analysis the level of debt is not a concern. See for example the following pages from presentations made in September 2009 by the Bank of Canada and CIBC World Markets. Of course freedom from the narrow mainstream box would allow for much greater leeway to do what so urgently needs to be done.
“Sedond, there is a growing talk in the US that Obama might be considering more stimulus- which is quite contrary to balanced budget talk.” – Paul T.
Is it really necessary to model are decisions after the US Administration, thats has spent trillions to get a measily uptick in GDP compared to historical standards of stimulant intervent. 2009 the US Dollar has lost 10%, which hurts Canadians & No WW2 to solve unemployment. modeling a Consumer Driven Export market, meaning we unfortunately have to have a stronger dollar to increase the affordability for canadians domestic & foreign. 3-10 years, down the line, there might be another crisis & for sure unfunded liabilities will increase our deficit, not reduce it even after deficit reduction. We need a central bank, Like India, who monitors both asset & price inflation or Australians CB.
Australia, is starting to tighten there budget & had higher interest rates during the boom years, has shown the errors in easy monetary intervention for too long.
Stimulus more Stimulus, how much should we spend, should you be put in charge of reform, who should, who gets to spend what, do I get some, wheres my bailout money, How did you get the grant, what connection you pull, it creates confrontation, un-unifies the population etc, at least when you raise interest everyone hates you equally, it allow saver to use interest in capital formation and investing and consumption at a much more sustainable rate.
“First off, as Erin mentions, there is plenty of room for the govt to respond to the continuing crisis with more and targeted stimulus.”
who gets to dictate what enough is Should we breach the maximum that erin described
“Sedond, there is a growing talk in the US that Obama might be considering more stimulus- which is quite contrary to balanced budget talk.” The only comparable to in the US is to FDR New deal which he threw stimulus after stimulus has a creditor nation, is own Treasury secretary said they didn’t do any good, then WW2 solved unemployment which FDR and his stimulus never did, the fact obama need another stimulus after have three already, TARP, TALF and The stimulus package. Do we really want to destroy ourselves?
taregeted stimulus is the operative word, i.e. smart stimulus, focused on those in need, innovation, and the shift towards developing a higher value adding economic engine. Green would also be a guide post for development.
Yes lets spend, but do it in a manner that is socially and creative destructionist based.
We are not out of the woods yet and no I am not a fan of bankers on welfare or across the board corporate tax cuts.
A follow-up to my earlier comment. I note that the pages I was referring to are not linked directly, but only the first pages of the presentations are. The Bank of Canada reference is to Chart 4, entitled ‘Low government debt level in Canada’, on page 17 of the presentation made by Deputy Governor John Murray . The chart shows that Canada has the lowest level of debt to GDP ratio of the G7 countries.
The CIBC World Markets reference is to the graph on page 24, entitled ‘Ottawa not heading back into debt trouble’ of a presentation by Chief Economist Avery Shenfeld. The CIBC graph projects the effects of a yearly $30 billion deficit over 10 years, showing a declining debt to GDP ratio.
My point is that even within the small mainstream economic box, the Canadian government has the ability to play a greater role than it has chosen to do. For instance it could provide adequate support to unemployed workers, assist retirees and near retirees many of whom have lost a large part of their pension savings, and fund a public pharmacare program.
“My point is that even within the small mainstream economic box, the Canadian government has the ability to play a greater role than it has chosen to do. For instance it could provide adequate support to unemployed workers, assist retirees and near retirees many of whom have lost a large part of their pension savings, and fund a public pharmacare program.”
yes but the box that neoliberalism created is much smaller than the world these economists who built this box now wish to live. It’s alive screeched the good doctor!