>From: "Chris Alders" <[log in to unmask]>
>Reply-To: "Chris Alders" <[log in to unmask]>
>To: <[log in to unmask]>
>Subject: Paul Martin, the Deficit and the Debt
>Date: Mon, 8 Mar 2004 02:48:14 -0400
>
>
>Greetings and salutations!
>
>The divide between political myth and political reality in Canada is very
>stark.
>
>As Linda McQuiag and Isabella Bakker have successfully pointed out in their
>writings, the creation and ballooning of the federal debt arose from two
>principle factors. The first was the dramatic elimination of corporate
>taxation between 1961 and 1991. This was a period over which taxes for
>corporate entities declined by a factor of three whilst taxation for middle
>and lower income Canadians went up by a factor of four. The second factor
>was the high interest rate policies adapted by the Bank of Canada which
>served to destabilize employment thus contributing to the growing divide
>between rich and poor.
>
>Thanks to the embracing of policies by both Liberal and Conservative
>governments which could have arisen from Dr. Milton Friedman and the
>Chicago School of Economics (which in the 1970's espoused what is referred
>to as monetarism) Canada now has a social deficit the likes of which has
>not been in existence since The Great Depression of the 1930's.
>
>Below is a summary of a report written by Jim Stanford of the Canadian
>Center for Policy Alternatives. The focus of this report deals with the
>actions (as opposed to the words or rhetoric) of Paul Martin, the current
>Canadian Prime Minister, who was its Finance Minister for upwards of nine
>years. Hopefully such articles will wipe away the myth and deal with the
>realities associated with Martin's policy-making.
>
>Take care and adios for now,
>
>Chris
>
>Paul Martin, the Deficit, and the Debt:
>Taking Another Look, Summary
>
>By Jim Stanford
>
>There is no doubt that Canada faced a serious fiscal situation when the
>Liberals were elected in 1993. There is no disagreement that the deficit
>had to be dramatically reduced or eliminated, and more importantly that the
>upward track in the federal debt burden had to be quickly arrested and
>reversed. And there is no doubt that, by these indicators, Canada has been
>a fiscal star among the group of industrialized countries since Paul Martin
>became Finance Minister. But it may well be that Mr. Martin's stellar
>reputation as a tough and prudent budgeter is not fully deserved. A broader
>second look at Canada's finances during the Martin era suggests that
>important errors may have been made on the road to the balanced budget,
>producing unnecessary but lasting social and economic harm.
>Canada's total public deficits (federal and provincial) from 1991 through
>1993 averaged 8 percent of GDP - twice the OECD average. However, by 1996
>Canada's deficit was smaller than any other G7 economy but the U.S., and by
>the next year the deficit was history (beating other G7 economies to a
>balanced budget by one to three years).
>
>At the same time, the return to fiscal balance during the late 1990s was
>experienced relatively broadly across the OECD. Indeed, a total of 18 OECD
>countries balanced their budgets late in the decade (and most of the others
>came within spitting distance of doing so), primarily because of the
>acceleration in global growth and a steep decline in global interest rates.
>
>The one aspect of Canada's fiscal turnaround that is truly unique in the
>international comparison is in the severity in the cuts to program
>spending, which were much deeper than any other major industrialized
>country. General government program spending, measured as a share of GDP,
>declined by 10 percentage points in Canada between 1992 and 2002 while in
>the OECD as a whole, program spending stayed roughly constant as a share of
>GDP. Some countries restored fiscal balance with hardly any spending cuts
>at all - and in some cases, while actually increasing government spending.
>
>Our analysis shows that Paul Martin could have overseen the quick
>elimination of the huge deficit which his government inherited, in line
>with his official timetable, yet without imposing a single dollar of
>nominal program spending reductions. The fact that so many other
>industrialized countries also eliminated deficits during the latter 1990s,
>most of them more gradually than Canada, and most without dramatic
>reductions in program expenditure, similarly supports the notion that real
>choices were available, while still accepting the general goal of deficit
>reduction. So Mr. Martin's decision to impose dramatic program spending
>reductions to attain a uniquely fast improvement in bottom-line fiscal
>balances must, therefore, have reflected priorities other than simply the
>desire to balance the budget.
>
>As for the federal debt burden, fell by 26 points of GDP between 1995 and
>2002, from 70.9 percent to 44.2 percent. Five-sixths of that decline was
>due to the expansion of GDP. One-sixth was due to the repayment of nominal
>debt, which declined by $50 billion during this time as a result of six
>consecutive federal surpluses. In other words, if Ottawa had simply
>balanced its books since 1997, instead of repaying $50 billion worth of
>debt, the federal debt ratio at the end of 2002 would have equalled 48.8
>percent of GDP, instead of 44.2 percent. That would still qualify us as
>having the second-lowest debt ratio in the G7. If that $50 billion had been
>invested in repairing some of the damage that was done to public programs
>and infrastructure earlier in the 1990s, it would have made an incredible
>difference to the concrete quality of Canadians' lives.
>
>Going forward, the federal government will face similar choices regarding
>the wisdom of discretionary repayment of its nominal debt. Mr. Martin has
>indicated that he would prefer to see the debt burden shrink to 25 percent
>of GDP. This will occur by 2012 if the government continues its official
>practice of allocating $3 billion annually to debt repayment (in practice,
>of course, Ottawa has allocated much more than this to debt repayment, in
>which case the 25 percent goal would be achieved sooner). If the government
>simply balanced its budget (rather than setting aside $3 billion annually
>for debt repayment), the 25 percent goal would be obtained in 2013 - a
>whole year later. Canadians should consider carefully whether these $3
>billion annual repayments are genuinely "prudent," or not. Which would they
>consider to be the more important, and prudent, act of government: say, a
>national public housing program which could help to eliminate homelessness
>(a generous federal contribution to which would be $3 billion
>per year), or making sure that our debt/GDP ratio declines to 25 percent by
>2012 instead of 2013?
>
>Since Mr. Martin's first budget in 1994, Ottawa has beaten its own
>bottom-line budget targets nine years in a row. This cumulative
>"overperformance" (actual balance versus budgeted balance) now equals a
>staggering $80 billion. It has become clear that there was nothing
>accidental about this overperformance: it was preordained by a set of
>artificial assumptions and practices all oriented toward making Ottawa's
>fiscal situation look worse than it actually was.
>
>Instead of facilitating an honest debate among Canadians about how
>available resources should most effectively be allocated, and to what
>priorities, Finance officials expend more energy trying to convince
>Canadians that those resources are not even there. As a result, the only
>thing we now know for sure about official budget forecasts is that they are
>not intended to be accurate. This aspect of federal budget-making is
>perhaps Paul Martin's most dubious legacy as Finance Minister.
>
>Instead of concluding that Mr. Martin is a hero for leading Canadians in an
>epic battle to eliminate the deficit (a battle which, after all, 18 OECD
>countries in total accomplished), perhaps we should be asking why he
>implemented such dramatic reductions in government programs that have been
>enduringly painful yet, in retrospect, were unnecessary. Our incoming Prime
>Minister might then be wreathed in a different aura indeed.
>
>
>Chris Alders
>24 Fairview Street
>Kentville, Nova Scotia
>B4N 1G2
>
>902-678-0326
>[log in to unmask]
>
>"It is only with the heart that one can see rightly. What is invisible is
>essential to the eye."
>
>The Fox in 'The Little Prince" by Antoine de Saint Exupery.

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