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Have Some Life-Long Debt, Son

Posted: 05/02/2013 5:25 pm

Most people would agree that you shouldn't have to pay someone else's tax bill. Despite all of the myths surrounding tax filing, this one is actually in accordance with Canadian law.

If a relative of yours were to die owing money, you have no obligation to pay their debts. It doesn't matter who they are, parents, siblings, aunts or uncles. If they have spent all their money, and die having nothing but debts, you're in the clear. However, unlike people whose debts die with them, a government's debt is carried forward forever (or until it's paid off). As we move through time, we're getting closer and closer to the point where it will be impossible to "clear our tab."

Debt numbers are always reflected as a percentage of GDP (Gross Domestic Product). GDP is representative of the overall economy. The idea is that if the economy is growing it will result in more government revenue (through taxes), thereby allowing the government to service "our" debt.

It sounds great in theory, but what if it doesn't grow? What if the cost of borrowing increases beyond our ability to pay? These are frightening considerations.

Whenever we're financial planning with clients, we take into consideration not just the servicing of interest on a debt, but also the repayment of the principal. We also have to look at the current situation and examine worst-case scenarios. I rarely, if ever, see governments doing the same thing. They tell us that if they spend more money now it will stimulate the economy and we'll all be okay. That may be true, but what happens when interest rates rise and our cost of borrowing increases?

I am not worried about my financial future, but I am worried about my children and my grandchildren. From the way things are going, we will not be able to leave our children with at least the same financial standard of living that we have enjoyed. Why should they have to do what we're not willing to do? And worse, in my opinion, is that future generations don't even have a say. Running a family budget is a little easier than running a government budget: but at the end of the day, it's still income and expenses. You either raise revenue (taxes) or reduce spending.

Last month, the former Premier of Alberta, Ralph Klein passed away. Under his leadership, Alberta became the only debt-free province in Canada. His mantra was that "debt is a spending issue." Maybe this is not 100 per cent true, but I hope that current and future politicians get the message. You can't keep spending and spending and hope your revenue catches up with it. It just doesn't work.

British Columbia had the HST pushed through legislature and the people pushed back. Regardless if you think it was the right thing to do or not, what's important is that the "people" can direct their own destiny if there is the will to do so. It's time for governments both provincially and federally to stop this mass accumulation of debt and set future generations free.

 

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