Inside Canada's Government Debt Problem and the Way Out: 1995 Edition

by Robin Richardson The Fraser Institute

CONTENTS

Preface
Executive Summary
About the Author
Acknowledgement
Chapter 1: Understanding All-Government Debt
Chapter 2: Unfunded Pensions, Old Age Security, and Medicare Liabilities
Chapter 3: Total All-Government Debt in Canada
Chapter 4: Government Debt In a Worldwide Perspective
Chapter 5: Five Steps Toward Reducing Canada's All-Government Debt
Conclusion
Bibliography

Preface

GOVERNMENT DEBT HAS REACHED CRISIS proportions in Canada. This study documents just how large Canada's all-government debt problem has become. We have joined the Third World.

The origins of Canada's all-government debt problem is spending beyond our means year-after-year and borrowing to make up the difference. The solution lies in spending control, not in higher taxes and fees.

This study is the first annual up-date of the foundational study of The Fraser Institute's International Centre for the Study of Public Debt. The Centre's mission is to inform the public in Canada and abroad about the severity of its all-government debt problem and to propose responsible and efficient ways to reduce the public debt.

The Fraser Institute is pleased that the work of the Centre is under the direction of Mr. Robin M. Richardson. Mr. Richardson has devoted most of his professional life to public policy issues affecting the well-being of Canadians. Concerned about the relationship of government deficit financing to inflation, Mr. Richardson's research in the mid 1970s prompted a national debate on this subject in business, government, and academic circles. He was an early advocate at that time of a constitutional amendment to force the federal government to balance its budget over the course of a business cycle.

Mr. Richardson presents a well-researched and concisely-presented study on the subject of all-government indebtedness. This 1995 edition expands the original study of "Inside Canada's Government Debt Problem and the Way Out" to include contractual commitments of Canadian governments and the unfunded liabilities of Canada's Old Age Security and Medicare programs. It also contains new analytical sections using debt affordability and foreign exchange exposure ratios for different levels of government.

The study concludes that Canada has joined the Third World in so far as its government debt problem is concerned. In total, 175 economies were considered to arrive at those in the Severely Indebted Category (SIC). Four measures of debt capacity and ability to pay are shown for Canada in comparison with 51 other severely indebted economies of the world.

As in the original study, Canada is divided geographically by provincial boundary to assess the level of all-government indebtedness with other jurisdictions, no matter where the Canadian taxpayer may live.

This year's Fraser Institute SIC List contains four indebtedness indicators of the level and affordability of government debt for the economies that are analyzed. The SIC List is also presented separately for low and middle income developing countries and for high income OECD economies.

This study does not just present a message of doom and gloom. It offers a positive message, too. It presents a 5-step plan for reducing the level of all-government debt. Canadians need to recognize the problem, learn from the experiences of others, and demand that their governments adopt the measures recommended in this study.

The consequences of doing nothing about Canada's all-government debt problem are disastrous. The disaster could happen at any time. This study provides both the incentive and the blueprint to do something now.

--Michael A. Walker

Executive Summary

(1) The product of research on 175 economies of the world, 12 of which are Canadian provinces and territories, this study concludes that Canada as a whole and each of its provinces have joined the Third World in terms of their overall government debt burden.

(2) Canada was the 51st most severely indebted economy in the world in terms of total all-government net debt in 1994-95. It ranked just behind Rwanda and just ahead of Cameroon on The Fraser Institute SIC List 1995 (Worldwide All-Government Debt--Severely Indebted Category).



(4) By March 31, 1995, Canada's all-government Net Debt-to-GDP ratio had risen to 135.9% (Expanded Financial Management System basis). This figure includes many debt categories left out by Statistics Canada such as contractual commitments, contingent liabilities, the net debt of tax-supported crown corporations, unfunded pension liabilities of most provincial civil servants and workers compensation plans and hospital debt.

(5) Including the unfunded Canada and Quebec Pension Plans, Old Age Security and Medicare, Canada's total all-government net debt was an estimated 369 percent of GDP by March 31, 1995. This makes Canada the fifth most severely indebted country in the world as far as its total all-government debt burden is concerned. The unfunded pension liabilities alone are currently $704 billion, the highest in relation to GDP of any of the Group of Seven (G-7) industrialized nations.

(6) Canada's total all-government gross debt exceeded $3 trillion ($3,098,252,000,000) by March 31, 1995. Debt per person reached $104,919; a family of four owed $419,675.

(7) The study contains a number of recommendations on how to reduce government debt.

•Stop making loan guarantees to other governments, government business enterprises, businesses, and students

•Sell off self-supporting government business enterprises and use proceeds to pay off government debt

•Introduce balanced budget laws with taxpayer protection and tough penalties for non-compliance

•Control spending to generate budgetary surpluses

•Use budgetary surpluses to pay off government debt

•Adopt debt elimination laws at all levels of government

About the Author

Robin M. Richardson, M.A., C.F.A., is Director of The Fraser Institute's International Centre for the Study of Public Debt. Born in Vancouver, B.C., his formal education includes a B.A. in Honours Economics from the University of Western Ontario where he was the gold medalist and candidate for the Rhodes Scholarship. He went on to earn a Masters degree in Political Economy at the University of Toronto, followed by post-graduate doctoral studies in international economics, and money and banking at Harvard University. Mr. Richardson is also a Chartered Financial Analyst.

Mr. Richardson's experience includes National Research Director and Chief Economist of The Canadian Taxpayers Federation, Senior Economist of the Toronto Dominion Bank, Senior Economic Advisor to the Canadian Federation of Independent Business, and Director and Chief Economist for Loewen, Ondaatje, McCutcheon and Company Ltd. In this latter capacity, Mr. Richardson represented his firm at the Toronto Stock Exchange as Vice Chairman of the Index Committee and helped develop the TSE 300 Stock Index.

Mr. Richardson taught as an Associate Professor of Economics at the Kresge School of Business Management of Asbury College in central Kentucky.

Concerned over the waste and duplication of government services, and the need to reduce regional tensions and foster national unity, Mr. Richardson assembled and co-ordinated a team of authors across Canada for the Fraser Institute to study how to disentangle federal and provincial spending within the existing constitutional framework. This study, Canadian Confederation at the Crossroads--the Search for a Federal-Provincial Balance, was published in 1978 by The Fraser Institute.

Elected Member of Parliament for Toronto-Beaches in 1979, Mr. Richardson served as Special Advisor on pension reform to the Minister of Finance and Special Advisor on small business policy to the Minister of State for Small Business in the Thirty-first Parliament of Canada.

Mr. Richardson's publications include contributions to technical journals, newspapers and financial periodicals, including Canadian Public Policy, The Globe and Mail, The Financial Post, and Equity magazine. A director of the Toronto society of Financial Analysts for many years and a founder and Past President of The Toronto Association of Business Economists, Mr. Richardson is now Vice President of the Association of Professional Economists of British Columbia and a member of The Association of Investment Management and Research, The Vancouver Society of Financial Analysts, and The Canadian Association for Business Economics.

Acknowledgement

The Fraser Institute's International Centre for the Study of Public Debt wishes to acknowledge the financial assistance of The Donner Canadian Foundation in enabling this study to be completed and published.

Introduction

The purpose of this study is to inform Canadians about the magnitude of Canada's all-government debt problem and propose responsible and efficient ways to reduce total all-government debt. By informing Canadians about these matters, we hope to dispel the all-government debt illusion which, unfortunately, is pervasive and has helped to create the conditions that have resulted in our present predicament.

Funk and Wagnalls Standard Canadian College Dictionary defines "illusion" as "a false, misleading, or overly optimistic idea; misconception; delusion." Funk and Wagnalls, Standard Canadian College Dictionary, Ontario: Fitzhenry and Whiteside, 1989, p. 668.Note The corrective for a false impression is to be correctly informed, to be given the facts of the situation so that rational decisions can be made.

All-government debt illusion may be defined as the failure of individuals to estimate correctly the changes in future tax rates and user fees resulting from new all-government borrowing and the need to repay the total all-government debt. The existence of this illusion has effectively weakened the resolve of most politicians to say "NO" to special interest groups who constantly urge more and more government spending. Why risk upsetting these groups when the money for their projects can be borrowed now and paid back later? As long as the public has all-government debt illusion they will not realize that today's high and rising all-government debt means tomorrow's high and rising taxes and high unemployment.

As Canadian taxpayers come to realize the true magnitude of the all-government debt burden they carry, it is hoped that all-government debt illusion will be dispelled. A continuing and effective all-government debt awareness program is clearly in the Canadian national interest. Education of the taxpaying public which leads to effective legislation to resolve the deficit/debt problem in a disciplined and orderly manner is a far better solution than facing a financial crisis such as has been the experience of many countries in recent years.

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.