Canadians are like shareholders in a gigantic $700-billion-a-year conglomerate. On Oct. 25, they will once again have an opportunity to choose their next chairman and board of directors. Unfortunately, Canada Inc. is a company with great assets but too many debts. And as obligations—the total government debt—pile up at the rate of more than $1 billion more per week, Canada’s shareholders had better ensure that they elect a board of directors that lenders will respect. That is because we have racked up $630 billion in provincial and federal government debts and by doing so forfeited total freedom to elect whomever we want. Lenders cannot veto our choices, but they certainly “vote” with their wallets after results are in. And Canadian voters who totally ignore the debt issue and vote for spendthrift politicians will imperil the nation.
Canada is in debt trouble unless politicians stop overspending. Besides getting $1 billion deeper in debt each week, we are borrowing much of this money from foreigners—and in foreign currencies. This is a formula for disaster.
Here’s the nub of the problem: if governments are paying an average of eight per cent interest on the country’s collective debts of $630 billion, then the debt will almost double to $1.3 trillion in just nine years, even if governments are able to run balanced operating budgets throughout the decade. But when you add to the total another $55 billion or so in estimated government deficits this year and even more in future, it’s obvious that the debt figure will double sooner than 2002. If interest rates climb, debts will grow more quickly too.
As for the country’s rich asset base, government policies have decreased its value by imposing restrictions on resource exploitation and higher taxes on businesses and individuals, forcing up wages and prices beyond competitive levels.
The first alarm about Canada’s looming
A disaster formula—
Canadian voters who totally ignore the debt issue and vote for spendthrift politicians will imperil the nation
debt crisis was sounded last month in the influential Economist magazine, which warned foreign investors: “The markets are taking a lot on trust in believing [Canadian] politicians’ promises to keep budget deficits under control. If those promises are broken, investors who have so eagerly bought Canadian government bonds, whether federal or provincial, without worrying about credit risk, could find themselves regretting it.”
So what do lenders want? A stable, majority government that will balance the budget, will rein in the profligate provinces by refusing to crank up the printing presses and will, if necessary, impose higher taxes. How this is done, or who does it, matters little to lenders. They just want what any other lender, or investor, wants: to be able to lend money with as little risk as possible at the greatest rate of interest. And if Canada looks like a bad bet, lenders—both Canadian and foreign alike—will simply loan their hardearned cash to some other nation-state with a rosier credit rating.
And what is certain to make lenders head for the hills—or hold out for higher interest rates because of higher risks—would be the election of a large number of Bloc Québécois
seats. That would spark a spate of news stories around the world, mostly inaccurate, about the impending breakup of Canada with the accompanying concern as to who would pay what debts and when.
Also worrisome to many lenders would be an inconsequential election outcome with four or more parties with blocks of seats and little possibility of forming a workable coalition. This would mean instability and another election call, possibly within months.
Voters should also be wary of Liberals, or NDPers, who would spend us poor in a misguided effort to create jobs. The only jobs their schemes would create would be temporary ones dependent upon public works projects paid for out of the hides of Canadians in the private sector, many of whom have lost their jobs partly due to such needless public sector spending. The only real job creation policy that ever works is in countries where taxes are low and where wealth creation is rewarded and encouraged, not taxed and hobbled with needless regulations or restrictions.
Like any board of directors that ignores the market realities, Canada’s conglomerate in the wrong hands would be driven quickly into the proverbial ground. Despite such facts, only the Tories and Reformers believe deficits are a priority problem. The rest must think Canada will always be able to borrow money, or that it will be able to simply crank up the printing presses to pay for their profligacy. They don’t understand that the only reason the world has supported our bad spending habits is because we have given lenders a slightly better rate of interest on their loans than they could get in the United States with what was considered, until recently, the same amount of risk.
But that’s changing as Canada’s condition deteriorates dramatically year after year. In early August, Canadian short-term treasury bill interest rates drifted downwards near enough to U.S. treasury bill levels that money streamed out of riskier Canada to the United States. This heavy selling was halted by the Bank of Canada, which quickly pushed up short-term rates, nearly doubling the spread against three-month U.S. treasury bills. Such relatively high rates of interest put Canadian businesses at a disadvantage vis-a-vis their American rivals.
August’s run on the Canadian dollar simply underscored how this country has lost much of its freedom to manoeuvre, either politically or monetarily, given our huge foreign indebtedness. And every day, our deficits further erode our sovereignty. That is why we cannot elect leaders who would spend more or tamper with the independence of the Bank of Canada in order to print more money. That won’t fool lenders owed $200 billion. Printing more money simply dilutes the value of the money they will be paid back with, leading them to bail out or demand an extortionate interest rate. So like it or lump it, lenders cast a longer shadow over this election than ever before in the country’s history. And Canada’s shareholders ignore this at their own, and Canada Inc.’s, peril.
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