Good news! Canada's budget deficit is shrinking even before the federal government introduces its budget cuts.
Canada is the only major economy that has fully recovered from the 2008 financial crisis. More Canadians are working today than in September 2008. No other G7 country can say the same.
As the Canadian economy grows, tax revenues rise. As Canadians return to work, government spending drops.
Bob Plamondon crunches the numbers in his excellent blog:
"[F]ederal revenues were up $18.5 billion last year; a healthy gain of 8.5 percent owing largely to rising personal income taxes.
More good news was that, with less demand for EI benefits and the winding down of certain stimulus measures program, federal spending declined by $5.2 billion.Unlike the previous year, where program spending exceeded revenues by $26 billion, the operating account for 2010-11 was essentially in balance. That left a deficit roughly equal to the debt charges of $31 billion.
Perhaps the best news in the government's numbers was that, with a $22 billion decline in the deficit, the federal debt-to-GDP ratio was held in check. In other words, despite incurring a deficit we are no worse off in relative terms."
That's why the bottom of a bad recession is a bad time to worry about deficits. The recession makes the deficit problem look bigger than it really is.
Worse, the actions a government might take to reduce its deficit -- cutting spending, raising taxes -- can prolong the recession. In which case, premature deficit-cutting can make worse the very deficits the deficit-cutters are trying to shrink.
Government budget deficits are not only a source of economic demand. They also counteract shrinkage of the money supply. The extra bonds created by a government deficits are often purchased by banks, where they expand the bank reserves that support lending to private businesses.
OK, OK, you know all this.
But even as you know it, serious people in the United States are overlooking this familiar fact -- and advocating actions likely to weaken America's already weak recovery.
Canada's success could be a useful corrective to this kind of misleading American thinking. The positive Canadian example can give Americans hope that their fiscal problems can be to a great extent self-correcting. The Canadian example can also give hope that as recovery accelerates, opportunities open to cut government spending at a more appropriate time.
A decade ago, American conservatives derided Canada as "Soviet Canuckistan." Now all is forgiven, even Medicare and the GST. Texas Gov. Rick Perry has built his jobs plan upon energy development, and Perry's supporters regularly cite the Canadian example as evidence their plan will work.
American conservatives would do well to learn from the Canadian example in its entirety. Deficit reduction must follow economic recovery. Get the sequence wrong, and you get neither recovery nor deficit-reduction.
This blog was previously published by the National Post.
Lawrence Korb and Alex Rothman: Open Letter to the Super Committee
The U.S. has a national debt of $15 trillion. This year's budget's projected interest expense on this debt was $250 billion, a relatively small amount because it represents about 7% of all spending on a 2011 $3.8 trillion federal budget. The interest rate on this debt is about 1.6%
And as long as interest rates remain low we can service the $15 trillion -- and, indeed, double that amount -- with relative ease and with relative painlessness.
The problem is if interest rates go up....and the math is simple although the numbers that we deal with are huge (lotsa zeros).
We've seen 20% interest rates in our lifetime. Well, let's figure rates go up to just 10% by 2015, the year in which Obama's own budget office projects a $20 trillion national debt:
10% of $20 trillion is $2 trillion.
Now, figure how much an annual interest payment of $2 trillion is on an annual budget of $3.8 trillion. It's more than 50 cents on every dollar going JUST in interest payments.
Where will the funds come from to pay Social Security benefits, medicare, medicaid, the military, education, food stamps, etc?
There is only one answer, of course, and one simple solution. The United States will engage in an aggressive self-inflicted policy of hyper-inflation by printing more and more money.
So - on this subject - instead of contributing knowledge I come with questions: where are the toxic derivatives, both in Canada and worldwide? Why was it necessary to transfer so much mortgage insurance liability from Canadian banks to the government backstopped CMHC in 2009 if our banks are so splendidly upright and healthy?
What is the true market value of those instruments and are taxpayers on the hook for the bad debt part?
How does this seemingly unsung chorus affect the greater Canadian economy? Or does it?
Is it a similar but larger paradigm in effect worldwide?
Should we follow the bouncing ball or should we follow the derivatives?
Am I exhibiting undue paranoia, the appropriate amount of paranoia or not enough paranoia?
I'm not trying to be a smart-a$$, I truly do not know the answer to these questions or even if they are valid questions. It's just my intuition, right or wrong, plus a few disturbing articles on the web that makes me wonder.
I have tried to Google my way through this but end up more confused than enlightened.
So, if anyone here can set me right on this basic issue or point to links that might help, I'd be very grateful.
People get so worked up about the word deficit, and how how shrinking it is the priority. The deficit needs to be eliminated, because all deficits are good for is growing interest payments to outside sources, and making every dollar spent that much less effective.
Canada might be on top when it comes to it's finances compared to others, but make no mistake our debt is growing along with every other major country in the world; the only difference is that our debt is growing slower.
The economics behind deficits are ludicrous, simply because it attracts 'investors' of debt, which essentially make money doing absolutely nothing. Once this fake value evaporates (as it has been doing across the globe) it cuts the legs out from under the economy. Fake values in mortgages, fake values in trading companies, fake values in banks; all of these are unreliable, and all of these love to hold debt.
The main advantage Canada has is natural resources, and we have to make sure we get our fair share from their sale. We need not need to play with deficits.
my small town was hit particularly bad and large construction projects were put on hold despite major municipal investment into water and sewage systems for these buildings (money which could have beens pent other places during this time like say foood for people hit really hard) but the most vulnerable people never saw a cent of the stimulus. instead tens of thousands of middle class white men who have had their whole lives to save were given jobs while the most vulnerable were left to scrounge as usual. btw im a man and white
hah i found a job serving and once you get that you are set so ya things are alot better but. im not sure how hard it is once people get their education to get a job especially as you say if they are in demand and skilled. but my first year uni was 5200 and second year was 7700 my concerns not just for me but future generations suffering really high tuition.
Cutting Public spending without a corresponding dollar for dollar increase in Private sector spending can only lead to a shrinking GDP in real terms. It will also increase the annual deficit as the economy generates less government revenue and places more demand on government programs.
It has nothing to do with deficit cutting.
==========
""Government budget deficits are not only a source of economic demand. They also counteract shrinkage of the money supply. The extra bonds created by a government deficits are often purchased by banks, where they expand the bank reserves that support lending to private businesses.""
Government budget deficits are not a source of economic demand. It is simply the result of the in and outflows of the Public sectors' revenues and expenditures over a period in time. It has NO impact on the money supply. Canada and the US both have currency sovereignty and are the sole issuer of their respect dollars, which are a fiat currency,
Changes in bank reserves it matters not. Banks do not lend reserves, period. In both the US and Canada any bank can fund any credit worthy customer due to the existence of a Central Bank in each country.
There is no Public debt or deficit crisis, it's a JOBS crisis.
Finally, I challenge you as to when will be a better time to get American politicians to discuss budget deficits than now. For the past 50 years, every time the economy begins expanding, American politicians start finding new ways to spend the money, leaving the federal fisc even worse off. For the first time in American history, the government was authorized to spend less money this year than it did the previous year (it still spent more using rainy day funds). If we don't have the debate about deficits now, when will we?
i mean thats basic household economics.. hmm if im only making this much.. and im spending that much... but again this is a structural problem of the US GOV as a whole. its not that it overspends as a percent of GDP the US has the lowest spending of all western democracies and the smallest public service..
As noted in the subset graph, the US collected over $2.3T in taxes last year, only a couple hundred billion short of in 2007 (deficit: $161B). Yet our deficit this year was $1.3T because spending has risen from $2.7T to $3.6T! This isn't due to military costs or some ticking time bomb in social security or medicaid costs (though they are going up too), it's because as soon as Obama came into office, pent up liberal demand for more spending jacked up baseline annual spending by over half a trillion dollars - which has persisted. As for those evil Bush tax cuts, note that income tax revenue in 2007 exceeded the level before those tax cuts took effect. They didn't have to pay for themselves in GDP expansion, they paid for themselves in direct revenue all while fighting a war.
Second, Canada is in such good shape now because over a decade ago, their liberals realized they had lost the Canadian middle class by recklessly expanding the welfare state. Under liberal then conservative governments, government outlays have shrunk from nearly 50% of GDP to a little over half that. This is in no small way responsible for why Canada has had such strong growth over the past 15 years, and is a repudiation of big-government policies championed by American liberals.
1--> The Canadian Case-Shiller index has risen linearly from about 75 to 145 over the past decade, with a slight divot during the recession (http://www.housepriceindex.ca/Default.aspx).
2--> The US Case-Shiller/S&P index over the same period rose from a little over 100 to nearly 200 in a geometric pattern and has since crashed back to the 130s (http://www.standardandpoors.com/spf/docs/case-shiller/CSHomePrice_Release_052506.pdf).
Therefore, you're completely wrong that "Canada experienced a housing boom almost identical to that which took place here in the states." Whereas the American boom was fueled by government policies and rank speculation (thus the geometric pattern), more traditional factors were at work absent so much artificial (i.e., government-drive) demand in Canada. Ergo the relatively tiny impact on housing and the subsequent recovery in real estate prices.
As for your claims about the rest of my post, how exactly do you explain Stephen Harper's rise to Prime Minister and the rapid drop in government spending over the past two decades (http://www.downsizinggovernment.org/canadas-spending-cuts-economic-growth) as part of my ideological spin? Note that graph includes state/province spending, thus it's higher than merely federal numbers.
I'd love to hear you explain in more detail in light of the above facts. I'm afraid I'm not seeing the evidence of your argument.
Commodity prices didn't "happen" to be high, they were driven up by speculators looking to avoid the inflationary effects of Bernanke's QE2. QE2 was effectively the US taxing the rest of the world to support their deficit.
"Caveat 3: Even if the good news continues, it is not sufficient in itself. Growth alone won't balance Canada's budget, new spending discipline will be required."
The thing neo-cons seem to miss while chanting the mantra "spending cuts" is that government spending is part of GDP. So spending cuts = GDP cuts = lower tax revenues. Additionally there will be a multiplier effect from government spending as the spent money circulates in the economy,so the magnitude of the GDP and tax revenue reductions will exceed the cuts by an unknown amount.
For every problem the neo-cons have a simple solution that won't work!