Debt Woes

In 1993, Canadians became concerned about the amount of debt its federal government was accumulating.  The debt/GDP ratio had risen to 68% and 35% of all revenue was going to pay interest on the debt.  It was time to get the financial house in order.

Over the next few years, a number of unpopular measures were instituted.  The Goods/Services Tax was introduced; the federal government stopped cost sharing with the provinces for health and social services; Employment Insurance eligibility was curtailed.  For a dozen years (1997-2008), the Canadian federal government ran a surplus.  The debt/GDP ratio fell to 29%, by far the lowest of the G7 countries.

Canadians, as usual, took these changes with stoicism, perhaps even with some satisfaction.  There was grumbling about the GST, but not many demonstrations.  Part of the reason was that the increased burden of providing services was absorbed by the Provinces; and the cutbacks were followed by a period of relative prosperity, during which the economy grew.

During the current recession, the Canadian federal debt/GDP ratio has climbed back to 38%.  The situation in all other developed countries seems much worse.  In the U. S., it sits at 70%; (100%, if you count debt to the Federal Reserve).  Some European countries have debt over 100% of GDP.

The Canadian and U. S. federal figures, of course, don't show the debt of the Provinces/States.  The Provinces of Ontario and Quebec have fared more poorly than the western provinces, as the Canadian economy has shifted from manufacturing to resources.  Down the road, they may face more austerity.

In the U. S., many states are struggling with their budgets.  Sadly, in Wisconsin, the first remedy is an attack on the collective bargaining rights of the public employees.  Turning Wisconsin into a "right-to-work" state (union membership not required, regardless of vote) will not help the people of Wisconsin.          

The solution to U. S. debt woes is tax reform; an honest, perhaps unpopular, review of entitlement programs; as well as the question of how much world-policing can they afford. For all the complaining about taxes, U. S. tax rates are low.  Such deductions as mortgage interest are of most benefit to the wealthy.  And why mortgage interest any more than rent?  Most developed countries have some form of value-added or federal sales tax.  There are bound to be unpopular choices, but they are much better than attacking middle-class workers.