The federal Conservatives propose to lower taxes slowly as they pay off the Canadian (federal) national debt with each year’s surplus. As each chunk of debt is paid off and disappears, so will the necessity of paying interest in it, and they will reduce the taxes taken each year by the amount the interest bill falls.
This seems like a pretty decent way to go, though I think it would be a good idea to invest in some national infrastructure with the surplus as well. Let’s fix all our stuff up and get it working properly again.
But I’m curious: what does “paying it down too quickly” mean? If Canada suddenly found 414 billion dollars worth of some resource on its territory, and somehow sold it at that price without messing up the world markets, and had a lump sum of 414 billion to apply to the national debt, and paid it all off at one go, why wouldn’t that be a good thing?
Well, I’m oversimplifying a lot here, but $414 billion is a HUGE amount of coin. Take your credit cards, for example. You have the convenience of being about to borrow a large amount of money at a moment’s notice. The card issuers also use this as a source of revenue to employ millions of people.
Let’s say that we found a “resource” that let everyone pay off their entire credit card balances tomorrow. All banks would fold. Millions would be unemployed. The interest that they were expecting for years to come has disappeared.
Now, let’s say that you were the frugal consumer who never carried a card balance. No bank will give you any interest on your deposits because NOBODY is borrowing.
In short, our monetary system is based upon lending and borrowing. When you have a large amount of money (the entire Canadian $414 billion debt) paid off quickly, then there is turmoil in the marketplace. Nobody likes turmoil; they like the “same”…
But there’s just no possible, conceivable way that could happen. All this blather from the Opposition is about a $14 billion surplus - about one thirtieth of the debt.
Given 30 years’ notice the lenders will find other borrowers.
Because all that money came from somewhere and everything has an opportunity cost. Every dollar used to pay the debt is one less dollar spent on health care, which is great unless you need health care.
Greenspan was interviewed on NPR and claimed that, before Bush’s big tax cut, he (Greenspan) had recommended paying the debt down to almost-nothing and then cutting taxes, just as the debt was about to disappear. This would have the result of trimming the surplus to near-zero and leaving a few billion dollars of debt sitting around as “float” for a debt-based economy.
In that state, a government can adopt a balanced budget amendment and remit any surplus to the people (or to social programs, or to buying more concrete bunkers with electrodes and blindfolds in 'em) if there are surplus years.
Offhand, I can’t see how paying off the public debt has a downside. If it turned out to have some unforeseen consequences, we could just issue new bonds and borrow our way back into debt - we’d get better interest rates and the government could buy everyone a pony.
I guess what I’m suggesting is that the majority of the media in Canada is controlled or at least influenced by the Liberal party. Try to prove me wrong, please.
A single (idiotic) Globe columnist does not represent the entire Canadian media. Lest we forget, it was the Liberals who started the trend of consecutive surpluses and using the proceeds to pay down the debt.
Anyway, if people can’t lend money to the Canadian federal government, they’ll end up lending it to firms and consumers instead, which is a good thing. The government, if it ever got the debt down to 0, would have to give out extra tax rebates(or fund more social programs) – and wouldn’t that be a horrible thing?
The point will probably end up being moot, however. The Liberals starting paying down the debt because they foresaw a future in which the baby boomers had all retired and there’d be extra strain on our social programs. Paying down the debt now will help us get through that period fiscally.
Edit: Come on, Leaffan, that’s not how things are done here. You’re alleging serious bias on the part of the media; you back it up.
While that’s true, leaving the moiney as debt simply means you’re incurring the opportunity cost of having debt. Not paying the national debt is exactly equivalent to a person not paying down their OWN debts, and saying “Well, there would be an opportunity cost to paying my Visa bill, so why not spend that money instead?”
Assuming roughly a 5% interest rate, making a $14 billion debt payment saves the federal government $700 million every year, essentially forever. There’s a hell of an opportunity cost to that interest, too. In the long term, it’s better to pay it off, and I would hope my elected representatives have the brains and the ethics to at least think of the long term some of the time, as opposed to the usual practice of trying to buy our votes with higher spending.
Of course there’s serious bias on behalf of the media! Most of the newspapers in the country are owned by a Liberal-friendly family! The CBC is as left-leaning as Jack Layton!
And the reason the Liberals were finally able to start paying down the debt was due to the fact that the Mulroney Conservatives negotiated NAFTA and introduced the GST. This was the impetuous for Canada’s return to balanced budgets, not something that Paul Martin did.
Yeah, this is my view as well. If paying off the debt turns out to be a bad thing, it’s not exactly difficult to get into debt if that’s what you want. And I want a pony.
Perhaps this should have a separate thread, but anyway; Russell Mills was fired as the editor of the Ottawa Citizen (Yep, an Asper paper) in 2002 for suggesting it was time for the PM (Chretien) to go.
Firing the editor of a newspaper for not vetting an article that suggested the PM’s time was up? This is freedom of the press?
Listen to any fucking CBC program and it’s all pro-Liberal, anti-Conservative shit. Even George Stroumboulopoulos is guilty of anti Conservative rhetoric.
I have had conversations about this with people who knew a million times more than I ever will about economics, but I recall two points. I have a feeling, however, that the most important points are the ones I forgot. But anyway, here they are as I remember them:
One, the government ought to hold debt for some functions because government debt can function like a piggy bank, not a credit card. For example, surplus Social Security revenues in the US are used to buy government securities in order to store the value of the surplus. We collect $100 billion “too much” in SS taxes, and we buy from ourselves $100 billion in securities. There’s a bunch of debt right there (which is calculated and treated differently from the “we’re running a deficit so we need to borrow money to keep the government running” debt), and that’s debt that a government can’t ever really avoid, but I have no idea if that’s included in that $414 billion figure.
Two, what is a debt to the government is an asset to someone else. Investors choose government instruments because of their stability. That stability comes at the price of the government needing to finance the debt, yes, but eliminating that debt means having to buy off someone’s assets. If someone wants to invest in these instruments of government debt, at some point, there will be a premium to the government buying off the debt it has sold. Like a commodity, if the government wants to buy savings bonds back from people, at some point people may think it is more preferable to collect the interest on their savings bond rather than sell it back at market price, or at least seek a premium for their commodity in a seller’s market. Buying back debt too quickly means that the price being paid will be out of whack with the rational value of the debt.
There is also a matter of central banks using debt to manage monitary policy, but I really don’t know enough to explain how that works. I hope I didn’t screw up the previous explanations I’ve had too much.
Some evidence for this statement would not be amiss. The GST was largely revenue-neutral, replacing as it did the old Manufacturer’s Sales Tax. The free trade treaties, first the FTA and then NAFTA, were easily the finest achievements of the Mulroney government, I’ll freely grant. I’ll also grant that Mulroney’s attempt to bring the deficit under control was not helped one bit by the nasty recession in the early 90’s.
But really, saying that Paul Martin had nothing to do with balancing the federal budget is beyond ridiculous. It’s not like the Mulroney Tories had been on the brink of eliminating the deficit in '92. Look at the last graph here and you’ll see that federal spending stayed between 16-18% of GDP during Mulroney’s tenure (84-93), and then dropped from 17% to 13% between 93 and 98. What Mulroney never managed to do was to hold spending constant in dollar terms long enough for the economy to grow past it, thereby increasing revenues sufficiently to cut into the deficit. Martin did precisely that for 5 years running before the deficit was eliminated, and wasn’t particularly popular for it in the early years. Sure, the recession in the early 90’s frustrated Mulroney’s budgets, while the dotcom boom of the latter part of the decade helped Martin’s, but Mulroney never demonstrated half the fiscal discipline Martin did. And no I’m not going to give Chretien a lick of credit for it - he tossed Martin into Finance with the expectation that Martin would fail badly and be removed as a rival power in the Liberal Party.
Well, I suppose it’s bad for those who want to continue to buy bonds, but there are a lot of bonds issued by local governments, universities, startup corporations, etc., so I think they’ll be OK.
Ok. Paying down debt in the US would mean… buying US Treasury bonds on the open market and retiring them. Here are some ramifications.
The Fed uses Treasury securities to conduct open market operations. So if we paid down the debt the Fed would have to… use something else.
US Treasury securities are a highly liquid financial instrument which are used by financial markets as a “Risk-free security”. If all treasuries were purchased financial markets would have to … use something else.
Presumably the above might apply to some extent to the Canadians.
Personally, I think the above two reasons are pretty weak. First of all, it’s likely that someday recession or war will strike, leading to deficit spending and making all of this moot.
Secondly, the Fed could conduct open market operations with any number of securities traded on the open market. Such actions would still affect the high-powered money supply and thereby affect interest rates.
Thirdly, LIBOR is often used as a proxy for the “Risk free rate” anyway, since it’s unaffected by changes in state taxes.
Fourthly, I strongly suspect that a decent substitute for US Treasury debt could be constructed by Wall St’s whiz kids. But see my first response: this won’t be necessary anyway.
Finally, if Treasury Debt was all that indispensable (which it isn’t) Big Government could buy a stack of corporate bonds, financed by… US Treasury Debt.
… which leads us to Chairman Greenspan’s real concern (I think). He didn’t want the Fed (or the US Treasury) buying lots of private securities, because he feared that somebody in Congress might want to use such holdings as a tool for public policy. That’s actually not a bad point…
… but it could be addressed by focusing US government and central bank purchases on the debt of US Agencies such as Fannie Mae and the like.
Say Canada sold its $414 billion stash of dilithium crystals. What should it do with the proceeds?
If it bought back all or almost all of its debt, presumably the value of those bonds would be bid way up. So a large part of the benefits of the one-off sale would accrue to holders of Canadian bonds.
Perhaps the Canadian taxpayer would want a better deal.
It would be more prudent for the Canadian government to take some of the windfall and form a Sovereign Wealth fund and purchase a diversified set of securities, whose interest (but ordinarily not principle) could be folded into the annual budget.
The government will have to pay that debt by taxing its citizens. That some investor somewhere considers my future earnings to be his “asset” is not a reason to perpetuate the debt.