An updated history of the federal government surplus deficit

In an upcoming post, I'm going to try to thrash out some of the details about the origins of the federal budget deficit, with an idea to figuring out how to make it go whence it came. But first, I'm going to set out some historical background, now that the data from the 2008-9 fiscal year have been added to the Department of Finance's Fiscal Reference Tables.

As I noted in this post, there's not much sense in comparing nominal figures across generations, so I'm going to express the numbers that follow as a per cent of nominal GDP and in terms of per capita 2009 dollars. First up is the deficit:

It's getting more and more difficult to remember just how bad things were before 1995. The federal government ran deficits upwards of 5% of GDP, year after year, for the better part of a generation. Here is what has happened to the federal government's debt:

The current situation is nowhere near as bad as it was 15 years ago, but no-one wants to get back in that hole again.

Here is how federal government spending and revenues have evolved, expressed in terms of per capita 2009 dollars:

Although real, per capita spending has gone up over the past few years, this increase should be put into the context of the cuts in the 1990's. Real per capita spending is pretty much what it was 25 years ago.

In any case, this isn't the appropriate metric for measuring the size of government. For reasons explained in great detail over here, the proper measure is the share of GDP:

Since 2000, the GDP share of federal spending has increased by 1.3 ppts, but the revenue share has fallen by 2.8 ppts. In other words, more than two-thirds of the narrowing gap between revenues and spending since 2000 can be ascribed to falling tax revenues.

Comments

[Nick Rowe]

Am I right in thinking that the biggest item excluded from the government budget, when program expenditures and revenues, is interest on the pre-existing debt?

Just eyeballing your graphs, it seems that most (about 5% points) of the work of eliminating the deficit (8% of GDP at it's worst, in 1985) was made up by reducing program expenditure relative to tax revenue. The remaining 3% presumably came from declining (nominal) interest rates from 1985 to about 2000. Sounds about right. If debt is 50% of GDP, a 6% point reduction in interest rates saves 3% of GDP on the deficit.

[Stephen Gordon]

The plot for debt payments in in that older post I linked to. Interest payments went from 6% of GDP down to about 2%.

I don't expect much action there in the short/medium term, so I didn't update that graph.

[Matthew]

Ok, so it seems that falling revenues are behind this deficit, and it supports the point you made in that previous post on runaway spending being a myth. But I'm not really convinced that share of GDP is a great way to measure size of government - its almost like saying, well we can afford to have more government so lets have more government, regardless of value added. Then again, I suppose it depends somewhat on what exactly we are trying to determine by measuring the size of government.

[www.facebook.com/profile.php?id=611985302]

You were too restrained about the source of the deficits in years past. The chief statistician at StatsCan concluded that deficit reduction effects caused most (80%?) of the deficit. Finance managed to keep the report from being officially published.

"didn't help" is too much of an understatement.

[DW]

Stephen,

Although I'm familiar with the mini-meme of Canada being the bastion of small government that the US once was, I'm still floored by these graphs. Fascinating.

Any idea how provinces contribute to this? Obviously if federal revenue is down to 15% of GDP and provincial spending has skyrocketed, we're no better off. (I live in Ontario). And, for that matter, municipal, though I imagine there's far greater dispersion the more local you get.

excellent post

[Christopher Hylarides]

DW,

Ontario's graphs would probably look similar if you consider the steady increases of spending of the PC's spending up until the 80s, the turmoil of the liberal minority and the NDP majority governments of the last 80s and early 90s, the cuts of the mike harris hears, and the steady increases again of the current government. See here:
http://www.fin.gov.on.ca/en/budget/ontariobudgets/2004/images/paperb9.gif

[Mark Dowling]

Is there similar data on the aggregate public debt, encompassing fed/prov/municipal? There have been past accusations that debt reductions at higher levels of government were achieved by downloading onto lower levels.

[Normand Leblanc]

I think that we should be looking at total debt. Meaning, individuals, all governments and corporations.

Using the BOC monthly report http://epe.lac-bac.gc.ca/100/201/301/bank_can_banking_fin_stats-ef/2009/2009-10.pdf we can see that individuals and corporations have increased their borrowing by 34% in just 4 years (see page 60).

In the 80s, the government could count on high inflation and a young population. Right now we have a -0.9% inflation and an aging population with skyrocketing health care cost and unfunded pension plans. All this on top of high energy price and planet earth to save.

In 1981 I bought my first house and had to pay 15.25% interest on my mortgage (mortgage is from french and means: gage à la mort...). The mortgage was roughly 130% our household annual income. At the time, my salary was increasing 10-15% par year and I was able to pay all my mortgage in 10 years. Nobody can do that today.

I prefer to be in the fiscal position of 1985 than today. When (not if)interest rates rises, we are done.

[Christopher Hylarides]

Normand:
You're rather return to the high unemployment, slow inflation adjusted growth, and difficulty saving of the early 1980s? Those times weren't sustainable because canada would have been bankrupt in 30 years due to our fiscal position alone. Poorer people would have had more difficulty saving as inflation would have devalued their current savings. What you're saying is from an economic perspective "if i take out a HELOC look at how my quality of life increases! WOW!" What do you do when you've maxed it out? You were lucky enough to be born and get a house at the right time. If we continued those policies, I'd not have as much opportunity today.

[Normand Leblanc]

Christopher,
What I'm trying to say is: TOTAL debt steadily increased compared to GDP since the beginning of the '80s. At the time (and history proved this to be right), the governement had plenty of room to raise taxes - and they did so - and the women were just entering the work force. In the meantime, individuals and corporations took more and more debt.

What do you think will happen when interest rates will go up? There is not much room left for new taxes and basically all women are now working.

The GDP growth that we are used to is a "fantasy". When we stop adding more debt (and be sure that we will do it, it is basic math), the growth will come back to normal, that is: Inflation + population adjustment + productivity gains.

[Nick Rowe]

Normand: one person's debt is another person's asset. Rising debt means rising assets too.

[Normand Leblanc]

Rick,
So let's borrow a million each. That's probably why there is so many people going broke down the border.

[Christopher Hylarides]

Norman,

I think we disagree on what causes inflation. I firmly believe that it's caused by expanding the money supply at a faster pace than population and productivity growth. If interest rates go up, which they'll have to as we can't stay at .25% forever, then we'll have to pay higher interest on the debt. I hope we'd have less of it to pay against. Hopefully when the stimulus is done, we don't have another to and another to erase the debt relief we've already had. But interest rates shouldn't get at insane levels unless we start having high inflation again, which means that it was artificially low before.

If the government had room to raise taxes then, then we have even more room to raise them now. Taxes are much lower than they were then. See here for corporate rates alone:
http://www.budget.gc.ca/2008/images/chap3-9b-eng.gif

But would these tax increases damage the economy?

There's nothing inherently wrong with "steadily increasing debt" either consumer or government, if it expands at the same rate or less of that of the economy or the debt is used to expand productivity. If we're building roads and subways great. I've just been to the states and this is what they're doing (EVERYWHERE). If we're just renovating hockey rinks and libraries well...

By 'we' if you mean the average consumer, that will never happen. Debt can be good if it's used properly. If it's expanded CC debt for big TVs then it's not as good or sustainable. If it's for houses (that you can afford) to live in or cars to get you to work it can be.

If by 'we' you mean government, bother Ontario and the Feds have done this, and the economy expanded.

[Normand Leblanc]

Christopher,
I do agree with most of your writing. To me, the single most important thing about debt is, as you say, that it do not grow faster than the economy. Stop me if I'm wrong but it has, in fact, grown faster than the economy for most of the last 30 years - except for 2 or 3 years.

Again when I write "debt", I'm referring to total canadian debt (individuals + corporation + governements).

[Andrew F]

I don't blame Nick/Stephen for throwing up their hands when we keep coming back to this "There's too much debt" meme.

[westslope]

Can Canadians get rich outside the resource sector? No. Well, at least not easily. Tax reductions help.

Can conservative, financially unsophisticated Canadians plan for retirement without the help of minimal-risk, high yielding government bonds or tax-sheltered income trusts? Apparently not.

High public debt levels translate into less wealth to "waste" on public services. And, ultimately, happier bond holders.

Besides, shouldn't fiscal policy be used to accentuate economic fluctuations especially in the context of commodity-driven booms? Don't Canadians crave the excitement?