D’ARCY JENISH May 1 1989



D’ARCY JENISH May 1 1989



With his greying hair, wire-rimmed glasses and dark blue suit, federal Finance Minister Michael Wilson was a model of prudence and propriety as he addressed the annual convention of the Retail Council of Canada on April 10. But Wilson left a disturbing message about the state of Canada’s finances with the several hundred delegates who packed a convention hall in downtown Toronto to hear him. In the hour that had elapsed since the delegates arrived, he said, the national debt had risen by $3 million. By dinnertime that day, the debt would have increased by another $26 million, he said. By the following morning, Canada would be a further $80 million in debt. Wilson, who has overseen financial programs that added $122 billion to the national debt since 1984, warned: “We cannot dismiss the debt as tomorrow’s problem. Ignoring the problem today would only make it worse tomorrow.” Conservative-minded economists and money managers applauded Wilson’s dire

warning. They contend that Ottawa has already fundamentally altered Canada’s capital markets with a deluge of long-term bonds and short-term treasury bills to finance its deficits. They say that the increasing size and frequency of the issues have driven up interest rates, squeezed out provincial and corporate borrowers and contributed to the country’s rising level of foreign indebtedness. But many labor leaders and liberal economists contend that there is no statistical evidence to link government borrowing with higher interest rates. They also maintain that the national debt does not impose an economic burden on the country because most of the money is owed to Canadians.

Threat: The national debt, the total accumulation of annual surpluses and deficits since Confederation, was $321 billion in the fiscal year that ended on March 31. The Tories inherited a debt of $199 billion when they took office in September, 1984. Its growth, and the resulting increase in annual interest payments

on it, now pose a major threat to government social programs and services, Wilson said. Even John Kenneth Galbraith, the noted Canadian-born, Harvard University-based liberal economist, now contends that Canada must reduce its federal deficit. In an interview with Maclean’s, Galbraith said, “It is better to pay higher taxes than to have the high interest rates associated with a large deficit.”

Still, while all three federal political parties and many business leaders are unanimous in denouncing the size of the deficit, most labor leaders and many economists disagree with the arguments that the deficits have driven up interest rates, distorted the country’s capital markets and crowded out private borrowers. They contend that the pool of savings in Canada is large enough to meet the financial needs of the federal government, provincial governments and private companies. Such critics also maintain that the federal debt is not an economic burden on the country because most of the money is owed to Canadians and their institu-

tions. Said University of Manitoba economist Ruben Bellan: “So long as the federal government finances its deficits by borrowing in Canada, no burden is assumed.”

The national debt has skyrocketed because governments have spent substantially more money than they have raised in every year since 1970. As the debt has grown, annual interest payments have ballooned. In the year ended March 31, the federal government spent $33 billion servicing the debt, which is equivalent to 31 cents out of every tax dollar collected. By comparison, Ottawa spent only $7 billion or 19 cents per tax dollar of revenue servicing its debt 10 years ago. The $33 billion spent last year on debt servicing—all of it borrowed money—was the federal government’s biggest single expenditure. It was double the amount paid out in benefits to Canada’s elderly,

20 times higher than spending on job training and creation, and 24 times higher than all regional development spending. Said Wilson: “You don’t have to be a financial whiz to know that when you have to borrow to pay interest to the bank, something is wrong.”

Value: The government bonds and treasury bills that Ottawa has issued to pay its debt charges are now largely held by institutions and individuals across the country. But in the past five years, the value of bonds and treasury bills purchased by foreigners has doubled to reach $45 billion. Every Thursday, the government issues $4.5 billion to $5 billion worth of three-month, six-month and one-year treasury bills, commonly called Tbills. Most of the income from their sale is used to pay off lenders whose bills are maturing. But about $500 million usually goes to the government to finance day-today operations, and that portion of the weekly borrowing is added to the national debt. Once a month, Ottawa also issues between $500 million and $1 billion worth of long-term bonds. Normally, half the money is used to pay off the holders of maturing bonds and the rest is used to help finance government operations and becomes debt.

Canada Savings Bonds (CSBs), which are sold to individuals every November, are also used to finance the deficit. The government usually counts on raising $10 billion to $15 billion

through the sale of CSBs. But since the beginning of this year, rising interest rates have triggered a stampede out of CSBs and into Tbills and other interest-bearing securities. Canadians have redeemed about $8 billion worth of CSBs, even though, effective March 1, the

government raised the interest rate to 10.5 per cent for a four-month period from the initial 9.5 per cent offered last November. Treasury bills, by comparison, are now paying 12.62 per cent.

The popularity of T-bills among individual investors mushroomed early in the decade because they were safe, short-term and offered attactive rates, said David Wilkes, vice-chairman of the Toronto-based brokerage firm Moss Lawson & Co. Ltd.

With larger and more frequent issues of treasury bills and long-term bonds, the government has had to offer premium interest rates in or5 der to keep attracting buyers, o according to Bank of Canada g officials and investment fund 5 managers. They concede that it is impossible to demonstrate statistically that government borrowing has led to higher rates. But one central bank official, who insisted on anonymity, said: “There has to be an impact. There is no question that less government borrowing would have a favorable impact on interest rates.” Donald Walcot, president of Toronto-based Sun Life Investment Management Co., said that the interest rate spread between federal bonds and those issued

by provincial utilities and private corporations has narrowed over the years as Ottawa’s borrowing requirements have grown. That narrowing is due to the premiums that Ottawa now offers to sell its bond issues.

The same principles apply to short-term corporate securities, said Paul Matthews, vice-president and treasurer of Toronto-based Stelco Inc. He noted that in April, 1987, the rate on three-month T-bills was 6.95 per cent while the rate on three-month corporate securities was 7.10 per cent. By March, 1989, the rates for the same securities had jumped to 11.87 per cent and 12.15 per cent respectively. Said Matthews: “Our rates are always going to be higher than the government rates. As their rates creep up, our rates creep up and it reduces our profits.”

Heavy: And many economists argue that heavy borrowing by the federal government has crowded out private borrowers and forced them to go abroad for funds. Erik Nilsson, senior economist with the Toronto-based Bank of Nova Scotia, said that Canadian foreign indebtedness had reached $220 billion at the end of 1988, compared with $63 billion a decade earlier. Nilsson estimates that $150 billion of the current foreign debt consists of long-term bonds issued by federal, provincial and municipal governments, Crown corporations, provincial utilities and private companies. Another $45 billion is in Tbills purchased by foreign investors, and $20 billion is in miscellaneous loans to governments and private companies.

Hard: Despite the size of Ottawa’s current debt load, many business executives and economists predict that the federal government will remain the country’s largest borrower for years. Matthews said that Ottawa is borrowing to finance consumption of government services rather than to build hard assets, such as highways, harbors and airports, that can be used by future taxpayers. In the past fiscal year, capital spending on lasting assets accounted for 1.2 per cent of the federal budget, while debt interest payments consumed 25 per cent. Payments to individuals under various social programs took 22 per cent, while transfers to the provinces for health, education and equalization payments took 18 per cent. Sun Life’s Walcot predicted that government would continue to absorb money that could be available to the private sector to upgrade plants and equipment. If that is the case, he argued, the net result could be a less competitive economy.




in Toronto and


in Ottawa