Congratulations! You’ve Sold Your Kids and Grandkids Into Economic Slavery

The dimension of public debt in Canada consists of national or sovereign debt, provincial debt and municipal debt. In addition, there is commercial debt and personal debt. The responsibility for paying off public debt is the taxpayer’s. Commercial debt is the responsibility of corporations and personal debt that of private citizens. So as a citizen, my total debt load may be represented by the per capita public debt figure plus my personal debt.

Because of the large number of provincial and municipal jurisdictions, we will look at the debt load of a resident of the city of Ottawa Ontario as an example. To facilitate aggregating debt across jurisdictions we use a per capita calculation. There are undoubtedly more meaningful ways of calculating debt load such as per tax payer or relative to total income tax paid since such an amount can provide a measure of ability to assume debt burden.

Canada’s National Debt

Canada’s national or public debt is defined by Wikipedia as “the amount of money owed by the Government of Canada to holders of Canadian Treasury security.” They further define “gross debt” as “the national debt plus intragovernmental debt obligations or debt held by trust funds [such as public pension funds]. Types of securities sold by the government include treasury bills, notes, bonds, TIPS, Canada Savings Bonds, and provincial government securities.” They give the total national debt for fiscal 2010-2011 as $551 billion.

The population of Canada as given by Statistics Canada’s population clock is currently estimated to be 34.62 million. The per capita debt load then, based on the Wikipedia’s number is $15,925.

The Canadian Taxpayers Federation (CTF) has a real-time debt clock:

It shows a total national debt of $570.7 billion and a per capita national debt of $16,613 as of this writing.

The Department of Finance of Canada publishes an Annual Financial Report of the Government of Canada. The 2010-2011 report in Table 6 of the section on Federal Debt, shows a net Federal Debt of $550.3 billion as of March 31st, 2011. This figure is virtually the figure used by Wikipedia.

Ontario’s Provincial Debt

As of June 30th, 2011, Ontario’s public debt stood at $244.7 billion as reported by the Ontario Financing Authority (OFA). Public sector pension plans hold about 6% of this and the OFA considers it non-public sector. We will consider it public sector since it ultimately is owned by the public. The page cited also shows the breakdown of the denomination of the debt. For example, $3.2 billion is denominated in Swiss francs. Consequently, with the rise of the franc recently, the real cost in Canadian dollars to repay this part of the debt would be more than $3.2 billion. And the government will not sell you, as a citizen of Canada, bonds denominated in any currency other than Canadian dollars.

The population of Ontario is given for 2010 as 13.211 million and for 2011, as 13.371 million using the reference scenario in the report. Assuming these are year end figures, we will use the average of the two or 13.291 million to calculate the per capita Ontario public debt to be $18,412 for June 30th.

Ottawa’s Municipal Debt

The city reported, at the end of 2010, a net long-term debt of $835 million in their consolidated statement of financial position. In addition, they reported another $221 million in mortgages outstanding. With a reported population of 870,250, the per capita municipal debt load (excluding mortgages) to a resident at the end of 2010 was $970.

Aggregate or Gross Public Debt

The aggregate public debt for a resident of Ottawa using the above calculations is about $35,995 based on the CTF debt figure.

The Global Debt Clock published by The Economist shows a total Canadian gross government debt of $1.252 trillion and a population of 33.9 million for a total per capita debt of $36,898. They do not explain what “gross government debt” includes but using their per capita debt and recalculating with the population estimate from above, we get a per capita figure of $36,185. This is close to the aggregate figure calculated above which suggests it includes all provincial debt but probably not municipal debt. An examination of their interactive graph reveals Canada’s per capita debt load is 4th highest globally behind Japan, Iceland , and Norway in that order.

As a final comment, some data such as population, can never be know precisely. During a census when it is measured, people are born, die, get counted twice, and get missed in the count. The frequency of censuses means one must calculate estimates in between. And a census is not an instantaneous event but may last for a month or more. Financial data, due to its nature, has much more precision, but the compilation and reporting of such takes time. Diverse sources may have different degrees of precision and different reporting times. Often, the best one can do is know a financial datum to within a month but no better.

Total Debt

We haven’t attempted to source data to determine total Canadian debt = public debt + business or commercial  debt + household or private debt. However, we have found this interesting graphic that shows how total Canadian debt compares to 8 other major economies. See A Graphic of Total Debt.

What Does It Mean?

As an afterthought prompted by a comment from a friend we thought we should explain what this all means. The acquisition of debt represents a present benefit that will be paid off from future earnings. Let’s look at it from three perspectives.

Private Or Household Debt

Suppose there was a time when you had a job (income) and no debt (a rarity for Canadians nowadays). You prudently saved a little each paycheque for future contingencies and had enough money for immediate consumption or personal benefit. The latter is called your standard of living. But suddenly you decide you deserve better – a higher standard of living.

You get a loan from your bank for a new more luxurious car even though your present car is running fine. You buy new furniture from a store that offers no money down and no payments for one year. You get a credit card from your bank and start dining out more often as well as buying more fashionable clothes. Your neighbourhood department store offers you a credit card with which to buy new kitchen appliances. You feel great, powerful, successful … until the end of the month. Suddenly, you have a fistful of bills that you never had before. These bills, consisting of principal and interest charges on your purchases, will be coming monthly until the debts are paid off years down the road; and they are for an amount greater than what your paycheque will cover.

You have six ways to deal with this financial crisis:

  1. Dip into savings but this will happen monthly until your savings are gone.
  2. Try and borrow more, say with another credit card or from the brother-in-law.
  3. Reduce your consumption to levels below what it was prior to the buying binge, creating a lower, more austere but sustainable standard of living.
  4. Increase your income with a second job. Due to increased expenses, the net increase in income often is not as much as expected and one’s quality of life suffers significantly.
  5. Sell assets such as the second car to raise money. Like point 1 above, this is a short-term fix only.
  6. When the other options are not enough, default on your obligations and declare bankruptcy.

What we are trying to show is that deficit spending – spending more than you make – has nothing but negative consequences down the road. A heavy debt burden means you will face a lower standard of living in the future than what you would have enjoyed had you not incurred the debt in the first place. The reduced standard of living will persist for many years without significant increases in income. In effect what you have done is move your future consumption forward into the present. You have robbed your future self of a higher of living standard by shifting it forward to today.

Commercial Or Business Debt

It turns out that the general principles that we described above for persons also apply to companies. Companies consume products and services (employees’ labour) but with a different benefit in view. Companies substitute financial gain for personal enjoyment. To take advantage of opportunities to maximize profits they may need to borrow money.

Copper prices are low right now so if they stockpile copper today, they may see a reduced cost of manufacturing in 6 months that will give them pricing advantage. Replacing obsolete or inefficient machinery, hiring more research staff, buying a certain small company that does something they need, may be just a few of the opportunities to grow that require money now that the company doesn’t have.

Personal consumption described in the last section is what drives the business economy. The individual behavior described above is basic human behavior – at least in our society. The increased consumption in the present based on borrowing, across the entire population, results in economic growth in the country. Businesses expand to meet the new demand. They buy new machinery, hire more employees, increase wages and benefits, build new factories, and buy more raw materials. But when consumer debt overwhelms consumer spending, consumption begins to contract, business cut back on purchases of materials, lay off workers and reduce wages. In short, the country finds itself in a downturn until the excesses of the spending boom are worked out. This is a normal business cycle that lasts on the average, 4-5 years. When the correction is severe, the result is called a recession which can create a financial crisis for an indebted company.

Companies can meet a financial crisis by:

  1. Dipping into savings.
  2. Trying to borrow more from banks or other institutions.
  3. Reducing consumption by layoffs, plant closures, cancelling orders with suppliers, reducing work weeks, etc.
  4. Selling additional stock or corporate bonds into the market.
  5. Selling assets such as plants or unprofitable segments of the company.
  6. When the other options are not enough, defaulting on obligations and declaring bankruptcy.

A heavy corporate debt burden can reduce profitability and competitiveness and force companies to forgo favourable business opportunities as they arise. Dealing with debt, especially in a downturn, is not a pleasant experience for a company. True, if the company survives, it will be leaner and meaner and more competitive, but it would have taken much pain and loss to get to this better place. The higher the debt load of a company going into an economic downturn, the more severe will be the cutbacks and the higher the risk of business failure.

The key point is higher debt loads incurred now restrict future profitability and growth.

Public Debt

Governments have only two significant sources of income, user fees and taxes. Unlike private individuals and corporations, governments destroy or transfer wealth but never create it. Governments can still run a balanced budget or a surplus but in the current financial crisis that began in 2007, governments around the world have been running large deficits and building up massive debt. The current phase of the financial crisis is primarily about accumulated sovereign debt and the need to fund deficits on an ongoing basis. So how do governments do this?

Like us they have similar ways to deal with a financial crisis:

  1. Dip into savings if they have any but these are quickly exhausted.
  2. Try and borrow more through government bond auctions. As we are seeing this is becoming increasingly expensive and sometimes infeasible.
  3. Reduce expenditures through what are popularly called austerity measures.
  4. Increase income through higher taxes and user fees.
  5. Sell assets such as government properties, land and any commercial assets they run, but these are also quickly exhausted.
  6. The magic bullet that individuals and corporations don’t have that works for a while: printing money.
  7. When the other options are not enough, default on their obligations, effectively a form of bankruptcy although we’re too polite and genteel to refer to it as such.

All of the above measures have problems of themselves and may be counterproductive, a good topic for another post. There are two important points to make.

The first is, as in the case of individuals and corporations, solutions to debt incurred in the present time have larger long-lasting negative future impacts. Higher taxes reduce consumer spending and economic activity. This reduces the standard of living while reducing government sales tax revenues. Austerity programs that reduce some expenditures cause significant economic pain to many individuals, increasing social entitlement program expenditures while reducing government income. We will suffer a reduced standard of living and lost potential growrth for a generation or more.

The second point is that when we die, our estates are settled including all personal debt. Our descendents inherit non of our personal debt. The same happens with companies. When they die, employees, shareholders, directors and others associated with them do not incur any outstanding corporate debt. With sovereign debt it is different. When we die, our children are saddled with the debt our generation has racked up. The debt our country has taken on to give us the standard of living we enjoy means that our children and grandchildren will be paying for it long after we are dead and will enjoy a lower standard of living as a consequence.

Hence the title. Thanks kids.

Putting It In Perspective

Addendum: 20111215

In our post “Pensions: The Dragon In the Woodshed“, we review a paper by Alexandre Laurin and William B.P. Robson of the C.D. Howe Institute that estimates unfunded liabilities are under-reported by $80.5 billion. Their calculation is based on the use of fair-market interest rates instead of the unrealistically high rates used by the Feds.

Using their results and the population figures above, we can add another $2325 per capita to Canada’s debt.

Addendum: 20120103

Bloomberg reported today: “World’s Biggest Economies Face $7.6 Trillion Bond Tab as Rally Seen Fading“, the following sovereign debt that has to be rolled over in 2012. For Canada, the amount is enormous – $221 billion or 40% of the total national debt. Of note is the $14 billion in interest on the debt which has to be paid this year. Since Canada is running a deficit, this will be raised as new debt adding to the existing debt.

Country    2012 Bond, Bill Redemptions ($)      Coupon Payments
Japan             3,000 billion                   117 billion
U.S.              2,783 billion                   212 billion
Italy               428 billion                    72 billion
France              367 billion                    54 billion
Germany             285 billion                    45 billion
Canada 221 billion 14 billion
Brazil              169 billion                    31 billion
U.K.                165 billion                    67 billion
China               121 billion                    41 billion
India                57 billion                    39 billion
Russia               13 billion                     9 billion

The key point of concern is the magnitude of capital that has to be raised this year in the world. If lenders find they can demand higher interest rates for their investments, it could create or exacerbate a global crisis in sovereign debt. As Bloomberg notes:

Borrowing costs for G-7 nations will rise as much as 39 percent from 2011, based on forecasts of 10-year government bond yields.

The Next Ten Years

Grant Williams in his weekly letter reviewed in Things That Make You Go Hmmm…: 20120318, reproduces a table of the $32 trillion of sovereign debt that has to be rolled over in the next 10 years:

This raises two questions: can it be done and at what price (interest rates)?

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