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Trudeau’s plan to borrow our way to wealth is looking crazier all the time

Moudakis Cartoon

Moudakis Cartoon

More from Tasha Kheiriddin available here.

If you can’t hit the target, change the target. That seems to be the new Liberal mantra on everything from resettling Syrian refugees to reinstating home mail delivery to running “modest” deficits.

While some adjustments in policy (such as extending the refugee timetable) are prudent, others are not — such as piling up more and more debt that eventually will have to be paid back, and that will cost taxpayers ever more in debt servicing along the way.

But never fear — there’s a way to sell that dodge too. The Trudeau government has decided to simply ignore its original campaign pledge — $10 billion deficits — and focus on a different one: reducing the debt-to-GDP ratio.

Since most Canadians likely have no idea what that is, the government is one step ahead of the game already. It’s the equivalent of distracting a crying child who just dropped her ice cream by yelling, “Look sweetie, a pony!” The child will momentarily forget that she no longer has dessert and assume that a) she’s getting a pony ride, b) she’s getting a pony for her birthday, or c) when you drop your ice cream, a pony magically appears. It stops the wailing — but only for a little while.

So what is the debt-to-GDP ratio, exactly? It’s the number you get when you divide nominal GDP — the sum total of all the wealth produced by a country — by the amount of debt held by government. If you just count the federal government’s $600 billion debt, then Canada’s debt-to-GDP ratio is a relatively modest 31 per cent. Add the provincial debt, however, and it pushes the total up to $1.2 trillion and the ratio up to 66 per cent, on a total GDP of $1.8 trillion.

open quote 761b1bWhile it’s possible to reduce debt-to-GDP ratios while running deficits, governments tend not to — because economic growth cannot always outpace debt growth, and debt growth itself tends to hamper economic growth.

While each level of government is responsible for its own borrowing, at the end of the day there is only one taxpayer, and he or she foots the bill to service the entire amount. The share you pay depends on where you live.

With a 50 per cent debt-to-GDP ratio, Quebec spends 11 per cent of its provincial budget on debt interest. Ontario has a 40 per cent debt-to-GDP ratio, costing its treasury 9 per cent of its revenues per year. B.C.’s debt-to-GDP ratio is 17 per cent, representing about 6 per cent of its annual budget in debt servicing costs. As for the federal government, it spends 11 per cent of its budget on debt servicing. This is roughly the same amount it collects in GST revenues, and nearly as much as it spends on Old Age Security every year.

Based on current projections, Ottawa’s share of the debt-to-GDP ratio is slated to drop over the next few years, giving the federal government ‘wiggle room’ when it comes to how much debt it decides to take on. The new number being floated is $25 billion per year. This echoes the assessments of economists like Andrew Sharpe, executive director of the Centre for the Study of Living Standards, who said that “you can have a deficit of over $25 billion and still have a stable debt-to-GDP ratio, which is approximately 31 per cent of GDP.”

But while it’s possible to reduce debt-to-GDP ratios while running deficits, governments tend not to — because economic growth cannot always outpace debt growth, and debt growth itself tends to hamper economic growth.

Case in point: Ontario. Between 1965 and 1971, under Premier John Robarts, the province racked up debt, but economic growth drove the debt-to-GDP ratio down. The same thing happened during the tenure of David Peterson in the late 1980s, and Mike Harris in the late 1990s and early 2000s.

But under Bob Rae, Dalton McGuinty and Kathleen Wynne, both borrowing and the debt-to-GDP ratio have soared. Just as budgets don’t balance themselves, “modest” borrowing and its resulting stimulus do not bring down the debt-to-GDP ratio — especially if economic growth is hampered by other factors, such as high taxes, overweening regulation, and other disincentives to investment and job creation.

Will taxpayers fall for the promise of a shiny pony in the next budget, and beyond? Based on the Liberal track record in Ontario, it’s entirely possible. That depends, of course, on what the other parents … er, parties, are offering. And on what an extra $15 billion in debt, per year, for the next four years, does to the Canadian economy. Let the wailing begin.

Tasha Kheiriddin is a political writer and broadcaster who frequently comments in both English and French. After practising law and a stint in the government of Mike Harris, Tasha became the Ontario director of the Canadian Taxpayers Federation and co-wrote the 2005 bestseller, Rescuing Canada’s Right: Blueprint for a Conservative Revolution. Tasha moved back to Montreal in 2006 and served as vice-president of the Montreal Economic Institute, and later director for Quebec of the Fraser Institute, while also lecturing on conservative politics at McGill University. Tasha now lives in Whitby, Ontario with her daughter Zara, born in 2009.

The views, opinions and positions expressed by all iPolitics columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of iPolitics.

http://ipolitics.ca/2015/12/14/trudeaus-plan-to-borrow-our-way-to-wealth-is-looking-crazier-all-the-time/

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