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Canada Joins the Debt Danger Zone

Canada is in the danger zone and as taxpayers sustain blows to their paycheques and portfolios and private-sector pensions, the governments in Canada (Alberta excepted) must tighten their belts and slash the pay and benefits of all of their public employees.
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The old British-France rivalry burst onto front stage when France's central banker responded to rumours that France would lose its Triple A status by saying Britain should first because it was in worse shape.

It was poor form and irrelevant to France's situation.

But Britain's predicament is serious too due to its ticking fiscal bomb of unfunded pension obligations to past and present public sector workers. This, by the way, is the case in most developed nations, including, but to a lesser extent, the U.S. and Canada.

Britain's unfunded pension promises, made to the 25 per cent of its public sector workforce, amounts to more than £2 trillion or 88 per cent of its $2.25 trillion economy.

"The Government has been borrowing off its own employees by promising them pensions in the future in return for work carried out in the past. Members of public sector pension schemes have a bigger claim on future taxpayers than the investors holding government bonds do," said John Ball, head of defined benefit pension consulting at Towers Watson in London last year.

Put another way, the public debt of Britain is now at 90.8 per cent of GDP but would be 178.8 per cent if the unfunded public pension liability were added.

It's no wonder that Britain last month suffered a debilitating one-day public sector strike against essential services after it began slashing retirement benefits. This is only the beginning. The government must crush its public sector promises to survive.

Britain's not alone, as a couple of recent reports have pointed out.

In 2009, a tri-national organization called the British North-American Committee (BNAC), estimated unfunded public pension liabilities (including military forces) for the U.S., Canada, and UK were equivalent to 15 per cent of the US GDP; 12 per cent of the Canadian GDP and 64 per cent of the UK GDP. It spotted the catastrophic British situation as unique.

It is clear that the UK stands out as having a major, and distinctive, problem in relation to its public sector pension promises. This has been brought about because a large majority of the UK public workforce have generous, fully index-linked final salary pensions which are completely unfunded, whereas funded [partially or fully] public schemes are the norm in the US and Canada.

Last week, the C.D. Howe Institute issued a report written by Alexandre Laurin and Bill Robson that noted a similar, although less severe, situation involving the Canadian federal government. It also stated that the government had not updated the size of its obligation for some time and quantified how the unfunded pension issue skews budgetary figures.

As of March 2011, Ottawa's net pension obligation was $227 billion, $80 billion more than reported in the Public Accounts. "Restatement of the debt affects annual budget balances: the surpluses reported from 2001/02 to 2007/08 were smaller [or were deficits] and the deficits since then were much larger," concluded the report. "In 2010/11 alone, the deficit would not have been the $31 billion reported, but half again larger: almost $47 billion."

Put another way, Canada's public debt of $551 billion or 35 per cent of its GDP of $1.557 trillion is understated: if the $227 billion pension obligation were added it would amount to 50 per cent of the GDP.

Then there's the provincial government debts which also have been often conveniently absent from statements as to Canada's debt-to-GDP ratio, but shouldn't because Ottawa guarantees them.

Canada's spendthrift governments (namely Ontario and Quebec) will surpass Ottawa's $551 billion debt shortly. And the ratings agencies are becoming wise to their ways.

Ontario received a "negative" warning from Moody's Investors Service this week. "The negative outlook on the province reflects the softening economic outlook, Ontario's growing debt burden, and the extended timeframe to achieving a balanced budget," said Moody's.

As of March 2011, Quebec's gross debt reached $173.4 billion and its various other guarantees brought the total to $225 billion. Ontario estimated that by next March, its debt will be $257.3 billion plus others estimate another 10 per cent guaranteed by the province elsewhere.

That brings their total to $507.3 billion.

About the only good news is that provincial and municipal pension obligations are mostly fully-funded. The other good news is that the three westernmost provinces have small ratio debts or no debt such as Alberta.

But the bad news is that the tally of federal debt at $551 billion, Ontario/Quebec debt at $507.3 billion, about $103.4 billion for the other provinces and the federal unfunded pension liability of $227 billion add up to $1.388 trillion or a debt-to-GDP ratio of 89.1 per cent.

This is only slightly less than Ireland. Canada is in the danger zone and as taxpayers sustain blows to their paycheques and portfolios and private-sector pensions, the governments in Canada (Alberta excepted) must tighten their belts and slash the pay and benefits of all of their public employees.

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