Who’s paying for the party?
Earlier this month the Economist ran a leader (editorial)Â and longer article asking and then largely answering who should for the costs of the economic crisis (public services and workers of course!).
That’s when I wrote the piece that leads the March 2010 issue of the Economic Climate for Bargaining publication that I produce quarterly.Â (I was in a bit of a budget work frenzy, so it may seem a bit over the edge)Â Â My main point in this was not only is it fair for those who caused the crisis to pay for it through higher taxes, but also unless we make tax reforms—closing loopholes, FTT, not proceeding with further corporate tax cuts, etc.–we’re just going to get into another asset-fuelled boom bust economic cycle.
Since then, we’ve had a number of provincial budgets announcing public sector wage freezes, so the answer to this question is unfortunately becoming even more clear: more of the same in Canada.
In thisÂ issue I also have a piece on the public sector’s role and share of the economy using different measures, picking up on the excellentÂ blog postÂ Armine wrote earlier onÂ a “Short History of Fiscal Constraint”.Â Â While there’s a convenient fiction that public spending in Canada is high, by pretty much all measures, the reality is that by pretty much all measures public sector spending, revenues and debt payments as a share of the economy haven’t been this low in decades.
All levels of government in Canada have been diminished, but none moreso than the federal government.Â And of course, most Canadians would benefit from more public spending (financed by progressive taxes) and not less as last year’s study from the CCPA on the benefits of public spending showed.
I’m not aware of any hard and fast rules that economics dictates about appropriate public debt ratios (outside of more extreme ones, of course), despite what the EU’s faltering Maastricht Treaty may prescribe, although there are some fiscal stability equations.Â Â Â The IMF says public debt/GDP ratios should come down to 60%Â , but I haven’t seen a rationale is for that particular number.Â Â It should of course depend on a lot of different factors that vary between countries.
Since I’m going to be needing a new mortgage soon, I decided to apply the gross debt payment ratios that the federal CMHC and major banks apply to households when determining their credit-worthiness.Â Â According to them, debt payment ratios can be up to 40% of a household’s annual income.Â If we adjust this for the fact that principal as well as interest payments are included in this, the interest-only ratio comes down to about 30%, (depending on different factors).
Right now, even with lower taxes and revenue ratios, less than 10%Â of every dollar of total Canadian government revenues goes to interest payments–far below the ~30% ratio that the federal government and banksÂ use as a rule for households.
So, next time a banker raises raises alarm about public debt ratios and preaches fiscal rectitude, they shouldÂ consider their own practices first!
This issueÂ of our quarterly publication also includesÂ analysis and summaries ofÂ recent economic, wage, and inflation trends (fromÂ earlier in March).