Sunday, October 7, 2007

Who Is To Blame For The Debt?

This was the main question in a discussion which followed the CTV article on last year's surplus. Of course, supporters of each party blame the other party for letting the debt swell to over $500B. Dave in Surrey suggests that "if it wasn't for Martin as finance minister we would be dealing with Mulroney's 50 billion dollar deficits". Another user, Brent, replies that "Tory government of 1984-1993 ran a surplus before you factor in debt interest" and suggests that public debt went out of control "because inflation and spending rose very quickly in the 70's. So quickly Trudeau had to rescind his 'no wage & price controls' promise." So whose fault it really was?

Let's look at the Federal spending and revenue table, provided by the Canadian Taxpayer's Federation. Looks like it was common for the governments before 1975 to run an operating surplus. But this operating surplus wasn't enough to cover interest charges on public debt, thus government had to get further into debt to pay the interest on what it was already owing. Then, after 1975, program spending swell way beyond the government revenues and the debt started accumulating much faster.

Between 1961 and 1975, the debt nearly doubled (from $14.8B to $28.4B), but the debt- to-GDP ratio nearly halved (from 36.3% down to 18.9%). In the remaining years of Trudeau government, the debt went up more than 5-fold (from $28.4B to $157.2B). Debt to GDP ratio more than doubled, reaching 39.1%. Mulroney government did manage to bring back the operating surplus, but didn't go any further than that, letting the interest charges (which had grown to tens of billions by then) triple the debt.

Yes, it wasn't until Paul Martin's war on deficit when the debt-to-GDP ratio started going down (peaking at 68.7%), which was later followed by the reduction in the actual (dollar) amount of our debt. To be even more fair to Jean Chretien and Paul Martin, I'd say that yes, they could have fulfilled their campaign promise to get rid of the GST instead of cutting the deficit (GST revenues were less than the deficit, so this would have been much easier task too), but then we would've had a $750B-$800B debt with interest payments over $60B a year.

One more thing that is worth mentioning when debating public debt:
In 1975 the debt held by the Bank of Canada was 21% of the total national debt. However, over the past 25 years, conservative and liberal governments' monetary and fiscal policies have reduced the proportion of the national debt held by the Bank of Canada from 21% to o­nly 5%, shifting the debt to private banks and non-residents, thus costing the Canadian treasury a loss of $6 billion per year in unnecessary debt (interest) payments.
To summarize: Trudeau government is to blame for boosting program spending beyond reasonable limits. Mulroney government is to blame for not doing enough to prevent the runaway interest payments from increasing the debt even further. Trudeau government is responsible for shifting the borrowing from the Bank of Canada to commercial banks. Mulroney government is responsible for borrowing to pay the interest to commercial banks, rather than using the Bank of Canada to consolidate public debt. Pierre Trudeau was a Liberal. Brian Mulroney was a Progressive Conservative. Thus - both parties are equally responsible for the financial mess they left after themselves.

1 comment:

NB taxpayer said...

There are two semi-hidden factors which could be mentioned. That being, the GST and free trade which was implemented by the Mulroney government and was essential in giving the government (down the road) room to fiscally maneuver.

So in retrospect, I would place the blame square on the shoulders of Trudeau for his poor fiscal management, not as much Mulroney. Although, as you mentioned, the numbers do tell a different story.