Another Portent of a Looming Federal Election

It turns out that that Federal Finance Minister Joe Oliver is reported as saying that “the government can shrink the national debt by growing the economy and ‘without actually paying off any debt’.” At the same time, as part of pre–budgetary consultations with the finance committee, the Conference Board of Canada, the Canadian Taxpayers Federation and the Canadian Council of Chief Executives have argued that reducing the federal debt should be a priority in the coming federal budget.  This does seem a rather odd coincidence of comments given the recent spate of austerity in Ottawa on the program spending side.

Of course, by shrinking the debt via growing the economy, the minister means reducing the debt to GDP ratio.  The 2014 Federal budget pegged the net debt to GDP ratio at 33.1 percent in 2012-13 and it is projected to go down to 27 percent by 2017-18.  Provided there is no global financial apocalypse in the offing, this will likely come to pass without too much effort.  Despite Mr. Oliver’s view that he does not need to get around to actually paying off the debt, even the absolute value of the federal net debt is projected to decline from 618.9 billion in 2014-15 to 596.2 billion by 2017-18.  I suppose the recent comments from the Conference Board and like-minded individuals are designed to pick up the pace of that movement.

So what gives? Well, as we move into budget season in early 2015 with a projected 6.4 billion dollar surplus for 2015-16 and federal election slated for the autumn of 2015 we have competing interests trying to stake their claim to the anticipated fiscal dividend.  The paramount interest for the government is of course getting re-elected and the Spring 2015 budget will give us a taste of what the new initiatives on the tax and expenditure side will be that are designed to take the government into the fall election.  Everyone is waiting to see if income splitting is where the government will actually go.  As for paying down the debt?  Even fiscal conservatives realize that paying down the debt during an election year is not bound to be a big vote getter. 

 

 

 

Comments

[Ron Waller]

At this point in the business cycle, paying down debt makes as much sense as any other idea the Conservatives have on the table: income-splitting, doubling the TFSA, spending freezes and other austerity measures. PIMCO also offers up a goody: raising interest rates. It's a surefire way to deflate the housing bubble…

If only governments across Canada would come to their senses and take policy advice from the "Canadian Taxpayers' Federation"!

[Bob Smith]

For what it's worth, I seem to recall that Abacus had some polling data which suggested that the "paying down the debt" option was more popular with voters than one might expect (certainly more so than the income splitting proposals). I think I cited it in one of Frances' posts. Mind you, polls are for dogs to pee on, so I wouldn't give it that much weight. Moreover, debt repayment was presented as an alternative to increased spending or income splitting, so set against those two options, I can see why Canadians would choose the former (the poor showing of income splitting when set against two completely boring and generic alternative policies should be a warning sign for the Tories). Presumably, both the Tories (and their opponents) can come up with more politically interesting ways of blowing the projected surplus.

I take the CCBC, CTF and CCCE messages about debt repayment as being an attempt to walk the Tories back from some of their stupider spending/tax policies. If they genuinely can't find anything better than those, probably better to do nothing with the surplus. Presumably Oliver's comments are an effort to assuage the generally fiscal conservative voters represented by those groups that he takes their objectives seriously (even if he intends to ignore their recommendation).

[Nick Rowe]

The Finance Minister is sounding very sensible to me. Assuming a 4% long run growth rate in NGDP (2% real, plus 2% inflation), times $620 billion debt, equals $24.8 billion. Which means we could run a $24.8 billion deficit and still have debt/NGDP ratio stay constant. And even with a $12.4 billion deficit, the real debt would stay constant.

The big worry is future medical etc expenses for an aging population. But that's more of a provincial worry.

[Bob Smith]

"The big worry is future medical etc expenses for an aging population. But that's more of a provincial worry."

True, although the distinctions between the federal and provincial level of government (especially in the context of medicare) isn't likely to matter to future voters. If the provinces start cutting medicare, there'll be pressure on the feds to to pony-up more money.

The one thing that can be said about debt repayment is that it's kind of a neutral policy option (not in the macroeconomic sense, but in the sense that it doesn't bind your hands in future years). If you can't think of anything good to spend money on (i.e., sensible tax cuts, sensible spending priorities), I suppose it's better than just tossing $6B into the maw for the sake of spending the surplus (particularly since it's a lot easier to increase spendind/reduce taxes than the other way around).

Then again, the same could be spending of cutting every Canadian a check for $200 dollars, and I suspect the latter would be more popular. Plus, any government that can't find something genuinely (or at least arguably) useful to do with $6B doesn't deserve to govern.

[Ralph Musgrave]

Contrary to Nick’s claim that “The Finance Minister is sounding very sensible..”, I suggest the finance minister, like most other politicians round the world, knows less about economics than the average snail. Reasons are thus.

The purpose of a deficit is to make up for any deficiency in demand caused by e.g. inadequate consumer or investment spending. And since no one knows what consumer or investment spending will be in 2 or 3 years time, having any specific objective for the size of the deficit is lunatic.

As for the debt, that can (at least in principle) be wiped out any time: just print money and buy it back, i.e. have a massive QE operation. As to any inflationary effect that has, that can be countered by raised taxes and/or cutting public spending. As long as the deflationary effect of the latter equals the above mentioned inflationary effect, GDP will remain constant.

As to what the optimum size of the debt is, relative to GDP, that’s a bit of an arcane and unimportant argument, as long as interest paid is negligible: i.e. somewhere between zero and the rate of inflation. (An interest rate below the rate of inflation means a negative REAL RATE: i.e. the debtors rip off creditors which is not a bad position for debtors to be in). Milton Friedman and Warren Mosler argue/d for no debt at all, a policy I agree with.

[Ron Waller]

No way Harper will run a surplus or pay down debt. He saw how foolish the Liberals were in taking that path. The Liberals essentially took the position that they would let the next government make all the big decisions on how scarce economics resources should be allocated. And Mr. Harper was glad to oblige.

Harper's agenda is, as the esteemed Mr. Gordon is so fond of pointing out, to "starve the beast." His $45-billion/yr in tax cuts were meant to put a future government in a small-government fiscal straight-jacket. (Which Justin Trudeau has vowed to put on.)

So if there is a surplus, how will Harper waste it to further starve the beast? Will he play to his base? Social con income splitting? Or give the rich a big break by doubling the TSFA? Both? My guess is that he will have to lock in ahead of schedule given the grim numbers in the polls over the last year in half.

His political strategy is certainly an interesting one. He tries to market the low-tax small government ideal to the people with countless boutique tax cuts. This is unlike Reagan and Harris who went for the direct appeal with income tax cuts (which primarily benefited the well off.) Harper doled out equal amounts of boutique tax cuts and corporate tax cuts for the wealthy (plus the sales tax cut for Western cranks.)

In any case, the neocon impetus to bankrupt democratic government works too well. These people tend to believe: more is always better. They don't think beyond the short-term. This is how it will blow up in their faces. They have created another never-ending economic slump just like they did in the 1930s. And things are just getting started. As people begin to deleverage, another crisis will hit. Then another. And what economic solution will they have to offer? More helicopter money that didn't work in the first place?

As Williams S. Burroughs once said: Hustlers of the world, there is one mark you cannot beat: The Mark Inside. The neocons' undoing will be falling for their own con: actually believing their economic policies will work when they were designed to destroy.

[Nick Rowe]

Ralph:

1. We have the Bank of Canada to adjust monetary policy to make sure aggregate demand is where we want it to be. We don't need fiscal policy to do that.

2. yes, we could always pay off the debt by having the Bank of Canada print currency to buy it all back. But then people would want to get rid of nearly all of that currency, because it pays 0% interest, which would cause aggregate demand to be far too big. And yes we could use a very big tax increase to make people hand over most of that money to the government to prevent AD from rising. But that's like saying we could always pay back the debt with a very big tax increase, and loosen monetary policy at the same time to prevent AD from falling.

[Patrick]

I'd be OK with debt repayment - keep our powder dry for the next crisis. IMO, a WITB increase would be good policy and probably good politics, but I haven't heard any party talking about that as a potential election year goodie.

Unfortunately, a military (mis)adventure in the Middle East could seriously eat into that 'fiscal dividend' and everyone might find the cookie jar is empty in 2015. F-18 sorties and laser guided bombs ain't cheap, and neither are the troops that will inevitably follow.

[Bob Smith]

"IMO, a WITB increase would be good policy and probably good politics, but I haven't heard any party talking about that as a potential election year goodie."

If the Tories do run on their previously announced income splitting proposal, I would be shocked if the Liberals or NDP (or both) didn't run on some variety of WITB increase, if only because the constrast between the winners and losers of such an increase m vis-a-vis income splitting is so obvious, glaring, and politically devastating.

[Ralph Musgrave]

Nick,

Re your No.1, obviously pure monetary policy CAN BE USED to control AD. But I long to know where the arguments are for ACTUALLY DOING SO. To be more accurate, where are the arguments for adjusting interest rates or QE (pure monetary policy) rather than creating new base money and spending it (and/or cutting taxes) when extra AD is needed? The latter policy of course combines monetary and fiscal policy.

In contrast, I set out a long list of reasons for thinking that interest rate adjustments aren’t too clever in section 1.6 here:

https://pdf.yt/d/J3al4g-8KAPvzA24

[Ralph Musgrave]

Nick,

An article has just appeared on the Vox site arguing for the above "combined monetary and fiscal policy" idea:

http://www.voxeu.org/article/effects-money-financed-fiscal-stimulus

[Ron Waller]

Is Harper going to "starve the beast" ahead of schedule? (before the next election?)

"Stephen Harper said Thursday that his government is about to implement major promises from the last election campaign, likely to include income-splitting for families with children and increased annual contributions for tax-free savings accounts to $10,000. ...

"The advantage of including the measures in the fiscal update, rather than in a spring budget, is that the tax cuts will be felt by voters in the spring – just months ahead of the next federal election."

NP: Ivison: Harper government to hand voters spring tax cuts aided by shrinking federal deficit

Will Trudeau vote against them now and support them after the election? (To keep his pledge not to raise taxes?) It'd be interesting to see how he'd squirm his way out that one...