THE NATION’S BUSINESS

High noon for debt showdown

Peter C. Newman December 19 1994
THE NATION’S BUSINESS

High noon for debt showdown

Peter C. Newman December 19 1994

High noon for debt showdown

THE NATION’S BUSINESS

PETER C. NEWMAN

Mark Twain once quipped that Richard Wagner’s operas aren’t as bad as they sound. But Canada’s debt burden is even worse than it appears—and 1995 will be the year of reckoning.

The problem with the issue is that any mention of gross domestic product ratios, net indebtedness or deficit rationalization makes the eyes glaze over and the mind go numb. For most Canadians, the national debt is the Meech Lake of the 1990s.

It doesn’t deserve to be.

The debt is real.

The $750 billion in total federal and provincial debt that we owe is no theoretical cluster of bookkeeping entries, like the former real estate holdings of Robert Campeau or the Reichmann brothers, that can be written off by jaded bankers. Having to redeem the national debt is no hypothetical proposition invented by politicians to justify social welfare cuts and higher taxes.

If Canadians began to think of the country’s debt in individual instead of collective terms, they would quickly realize that every man, woman and child currently owes more than $26,000. Just like a mortgage on a house or a condominium, that amount will have to be re paid—by us, or by our children. Such debts may be real, the doubters contend, but the International Monetary Fund cannot repossess a country, the way banks foreclose a car or a home. Perhaps not, but once the IMF be comes convinced that our debt load has become unsustainable, the Washington-based world currency watchdog will move in and de mand such severe cuts in public spending, in return for continued financial support, that Paul Martin will look like Santa Claus.

It’s Martin who will be the point man in any serious effort to deter or, eventually, assuage the IMF. Every increase in interest rates makes the finance minister’s assignment more difficult, particularly since his current debt-reduction targets have already been dis-

If and when the IMF moves in, it will demand such severe spending cuts that Paul Martin will look like Santa Claus

credited. Confidential IMF memoranda published in the Globe and Mail show that the IMF considers the government’s pledge to reduce the deficit to three per cent of the GDP by 1996 to be an inadequate target, although it does not say how much below three per cent that target should be. (This year’s deficit-to-GDP ratio will be about 5.4 per cent.) At the same time, Ottawa has assured the Washington-based fiscal policemen that it intends to wipe out the gap between revenues and expenditures before the next recession starts. But by the time Martin is due to realize his three-per-cent target figure two budgets from now, the economy will have been growing for five years, and that means we could be due for another downturn.

A quarter of a century of overspending has moved us far beyond the point when cuts in social programs and unemployment insurance will be enough to balance future budgets. Entire programs will have to be eliminated, and that will hurt. Those programs that do survive, according to Queen’s University economics professor Thomas Courchene, will “have to be turned into a positive force to enhance people’s skills— and our competitiveness.”

In the last recession, Canadian business restructured itself, and it was an agonizing process. Now, it’s the public sector’s turn. The announcement earlier this month that the department of national defence will reduce its current $ 11.3-billion budget by one percent, or about $100 million a year until fiscal 1997-1998, is only a start in the kind of deep cuts that will have to be made. Every government activity will feel the pinch.

The root of the debt problem is not some obscure philosophical proposition. It’s how to find the money to pay the bills, or more specifically how to raise the cash to pay the interest on the bills. Federal and provincial governments are now having to borrow $4 billion a month merely to pay interest on the existing debt load, which is expanding at roughly $100 billion every 30 months.

That’s a huge amount of money, and raising it is proving increasingly difficult for Canada’s investment houses. Nearly half our debt is owed to outsiders in the form of bonds and debentures. These foreigners who exercise no loyalty except to returns on their investments are becoming increasingly nervous about their Canadian holdings. Last September, the latest month for which figures are available, they reduced their holdings of Canadian securities by $1.9 billion, the biggest net sell-off in more than two years. According to Vancouver’s Fraser Institute, Canada is now one of the worst debtors among the world’s industrialized nations in terms of debt as a percentage of GDP. (Our debt now equals about 74 per cent of GDP, second only to Italy’s 113 per cent.)

Testifying before the Commons finance committee recently, John Bulloch, head of the Canadian Federation of Independent Business, pointed out that while we may not yet be in a debt crisis, we are certainly in a fiscal crisis. “That’s why 1995 will be such a pivotal year,” he said, advocating a freeze on civil service salaries.

Dealing with deficits and the national debt—particularly those amounts accumulated by predecessor administrations—is any Ottawa government’s least favorite activity. It’s the lousiest of political issues. Nobody wins. Success means raising taxes and/or cutting expenditures until nearly every voter in the country is cursing the politicians; failure means turning the country over to the less-than-tender mercies of the IMF.

The wild card in 1995, of course, will be the Quebec referendum. International money traders are about as romantic as computers. The notion of this country breaking up matters to them not at all, but whether or not the new Republic straddling the St. Lawrence Seaway would assume a quarter of Canada’s debt matters a great deal. So far, Jacques Parizeau has been deliberately evasive on the issue. A sovereign Quebec defaulting on its obligations could send the Canadian dollar into an unprecedented tailspin.

Our willingness and ability to tame growth of the national debt will decide whether we remain an independent country—or become a colony of the International Monetary Fund.