Who’s paying for the party?

Earlier this month the Economist ran a leader (editorial) 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.  (I was in a bit of a budget work frenzy, so it may seem a bit over the edge)   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 this issue I also have a piece on the public sector’s role and share of the economy using different measures, picking up on the excellent blog post Armine wrote earlier on a “Short History of Fiscal Constraint”.   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.  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.    The IMF says public debt/GDP ratios should come down to 60% , but I haven’t seen a rationale is for that particular number.   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.   According to them, debt payment ratios can be up to 40% of a household’s annual income.  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%  of every dollar of total Canadian government revenues goes to interest payments–far below the ~30% ratio that the federal government and banks use as a rule for households.

So, next time a banker raises raises alarm about public debt ratios and preaches fiscal rectitude, they should consider their own practices first!

This issue of our quarterly publication also includes analysis and summaries of recent economic, wage, and inflation trends (from earlier in March).

4 comments

  • if we were in Greece, well I would say it was up in the air as to who was paying.

    a sad outcome for all the economic upset that we have endured.

    Just wait, the double dip is coming. This attack on the public service is going global. I wonder who will bail out the financiers next time?

    Surely we will have Greece union actions all over the world soon.

    This is a serious mistake to make the workers pay for this lunacy of the financial meltdown.

    I wonder how all those neo cons are justifying this- oh right the fat cat public service workers- comes in to serve as the scape goats- such a handy lot these public sector workers.

    It is quite a disturbing outcome, and it is happening globally. All the Greek noise was about more than what the media was reporting.

  • I arrived to work today with a notice from my *ahem* union that the retirement fund lost 255 million, that fund is thus seriously underfunded and that the meager salary increases we received in the last four year contract will be diverted to make up for the underfunding. Moreover all professors will be frozen at their existing step. Three years down the road I will come out with a salary with a real purchasing power around 8% less than today. This is in stark contrast to those who mange the fund and those that sold them the toxic junk rapped in AAA packages.

    Merry capitalism same as it ever was.

  • Welcome to the real world. The less fortunate, single mothers, seniors and low income families, are in a perpetual recession. We must sit by and observe millions of our tax dollars, being handed over to the wealthiest corporations in the country, and, huge tax reductions as well. Oil is supposed to go up to $100 a barrel, and no doubt, the next Federal budget, will give oil company’s, millions of our tax dollars again. What really governs this country is, corruption and greed. There has been many a country, knocked on it’s ass, because, of just that. When the little guy, is exploited to death and owes a pile of money, they won’t care, what can be seized from them, they have nothing. Community’s are going underground and setting up bartering systems. Each community, must be able to feed everyone in a 100 mile radius. We, are again planting victory gardens, as we did during the war. That is how far back, BC has regressed. We will feed our own, and there will be next to nothing, purchased from the supermarket. And the Government of BC, can go right straight to hell, in a hand basket.

  • I was over optimistic it looks like a 5% give back for 10+ years in a political environment where it is going to be next to impossible for anyone working anywhere near the public sector to cover inflation in wage negotiations over the next five years. This is austerity plus.

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