Last Chance for the U.S. Economy!

by John Brian Shannon

This blog examines Canada‘s debt and deficit-cutting success of the 1990’s and early 2000’s which improved Canada’s credit rating, lowered borrowing costs for the government and when combined with a new 7% nation-wide Goods and Services tax (1990) allowed many job-creation projects to be funded which lessened the blow of the government’s (then) austerity program.

Read “How Canada Cut Its Deficits and Debt” — by former Prime Minister of Canada Paul Martin (prior to that he was Finance Minister) who famously took Canada from second-worst among the G-7 countries to the most stable economic performer in only a few short years. The above link takes you to a downloadable PDF document. It is a must-read for students of macroeconomics.

Paul Martin, 21st Prime Minister of Canada
Paul Martin, 21st Prime Minister of Canada (Photo credit: Wikipedia)

The Fiscal Turnaround

“When the Liberal Party took office, Canada’s deficit and debt were by far the worst among the G-7 but for one, and our level of foreign debt was the highest of the industrial world. Indeed, the Wall Street Journal had publicly dubbed Canada all but bankrupt. Four years later, our debt-to-GDP ratio was dropping like a stone. Our financial record was second to none and Canada’s deficit was no more.” — Paul Martin quote in The Magazine of International Economic Policy — The International Economy.

Many American friends of mine, are asking how the U.S. can solve its massive U.S. deficit and debt problems — problems which seem almost as insurmountable as going to the Moon was viewed in the early 1960’s.

The fact is, these problems have been solved in Canada and they can be solved in the United States. What has been lacking up until now, has been the will to act. Once elected, leaders who are empowered by their electorate to slay the twin dragons of debt and deficit could do so relatively quickly.

Some final advice from the Right Honourable Paul Martin former Prime Minister of Canada, the man most directly responsible for solving Canada’s historic debt and toxic deficit problem.

“The final lesson I would draw is that if deficit reduction is to be a priority, then it has to be a “national” priority.

When Canada’s debt ratio hit 70 percent, it was assumed by most economists that we had crossed the tipping point. The United States is there now, and the IMF projects that within eight years it will hit 115 percent. [!]

These are serious numbers, and yet the so-called deficit debate in the United States is not about the deficit at all. It’s about winners and losers.

One thing to remember from the Canadian experience it is that for deficit cleansing to succeed, there can be no winners while most people are losing. If deficit reduction is to gain public support, it requires a united effort—in other words, it must be a truly national exercise.” — Paul Martin quote in The Magazine of International Economic Policy — The International Economy.

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Government deficits and debt: Unsafe at any level?

by John Brian Shannon

Some countries do not have much debt, therefore they do not need to reduce their government debt.

At the other end of the scale there are nations which have far too much government debt – and although borrowing rates are presently low for governments in heavy debt, one day that debt will face much higher interest rates – making it much more difficult to pay off.

If they can’t presently pay for current spending and therefore need to run deficit after deficit – resulting in an ever-growing pile of debt, how will they pay the interest on all their accumulated debt once interest rates start to skyrocket! See Greece, Iceland, Portugal, Spain and Italy fall backwards (faster than they are doing now) at that point!

My own country, Canada has an 81.6% government debt to GDP ratio (all levels of government) this year according to The Economist’s Economic Intelligence Unit, which is an unacceptable level of debt, for three reasons:

1) it has in the past affected our credit rating with the credit rating agencies,

2) the debt chokes off growth as the government is constrained by that debt – and can’t borrow more money in order to stimulate the economy,

3) and the interest rate on that debt WILL increase over time which steals a nation’s wealth.

Many government’s with obscene debt levels are also (surprise!) in economic peril – so they must very carefully go about eliminating any deficit financing and paying down their debt.

If only they would pay it down during the “good economic times” then it wouldn’t pile up as it does.

The first rule then, is to not damage the economy further. Second, lower the amount of deficit spending until there is no more deficit.

Even this may take years to accomplish. The U.S. deficit is 1.4 trillion dollars this year, to suddenly cut that to zero would cause more damage than it would solve.

Third, growing the economy will generate much more revenue for the government in the form of taxes, some of which can be used to lower the deficit and once that is done, lower the existing debt. Exports help the economy directly as it is “new” money coming into the country.

Fourth, raising taxes also helps a government raise revenue to help with the deficit and debt picture, but this must be carefully done as it can prevent or slow recovery.

Fifth, lowering spending (austerity) helps to stem the economic bleeding, but governments can not afford to be clumsy about this, as it can wreak havoc with society.

Sixth, legislation passed to not allow deficit financing will prevent over-financing from occurring again.

Regarding the Canadian federal government budget announced yesterday: To balance the country’s books and to take care of the most important matters, here is how to do it:

A) Increase the HST by 1%, use that one percent increase for job creation ONLY. That would have stimulated the economy generally and that of families and individuals.

B) Inform every ministry and government crown corp, etc… that their budgets would face a one-time cut of 5% (every business person knows there is ALWAYS 5% “fat” which can be cut with minimal impact in any organization).

C) Inform MP’s that starting the day after the next election, there will be a new pay package – one which requires them to pay 50% of their pension contributions themselves.

D) Delay indefinitely, the F-35 fighter and purchase 20 ready-to-fly F-18 SuperHornets, or SAAB Grypen fighters or BAE Hawks – to replace the 20 worst condition CF-18 fighter jets and put them in a museum, where they belong.

E) Set up a 1-800 number so that citizens can suggest ways that any level of government can save money. If any ideas turn out to be viable, citizens should receive a $500.00 reward.

See, it’s easy to balance the budget over three years!

How does that compare to what the Harper Government actually has done with it’s latest federal budget?

Here are the highlights of yesterday’s federal budget as announced March 30, 2012 by Finance Minister Jim Flaherty. (Courtesy CBC News)

Canada (March 29, 2012)

This budget was aimed at reducing the federal deficit, and it brought cuts to everything from Old Age Security to a range of federal departments.

Return to budgetary surplus forecast by 2015

Budget balance for 2012: $21,100,000,000 deficit

Federal debt: $602.4 billion ($581.3 billion in 2011/12)

Public debt charges: $30.8 billion ($31 billion in 2011/12) This is the cost of financing ALL federal government debt

Debt to GDP ratio: 34.4%

Real GDP growth (this year): 2.1%

Revenue (per cent change): +2.9
Program spending: (per cent change): +1.4

Total expenses: $276.1 billion ($272.9 in 2011/12)
Key policy initiatives:

The federal government is cutting $5.2 billion in spending over the next three years. The government will ask people younger than 54 to wait an extra two years for old age security benefits, is killing the penny, and will trim the operating budgets of federal departments, resulting in 19,200 federal public sector job cuts over three years. Among those hardest hit are the Department of Finance, the Privy Council Office, Transport Canada and the Treasury Board.

National Defence lost the most money overall, with cuts reaching $1.1 billion by 2014-15. The CBC’s base funding was cut 10 per cent over three years, a reduction of $115 million by 2014-15. Elections Canada funding will be cut by $7.5 million a year, starting in 2012-13. Foreign aid and international development assistance across several departments and agencies is being cut by $377 million by 2014-15, with the Canadian International Development Agency to bear the brunt at $319.2 million.

There were no significant tax changes for individuals.

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If you want some easy to understand and up-to-date information about the U.S. deficit and debt – along with many excellent links, please see:  http://brillig.com/debt_clock/

Here is some of the information you will see there:

U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 29 Mar 2012 at 09:20:15 AM GMT is:

$15,595,309,331,866.20 ($15.6 trillion dollars by the time you read this)

The estimated population of the United States is 312,486,603
so each citizen’s share of this debt is $49,907.13.

The National Debt has continued to increase an average of
$4.01 billion per day since September 28, 2007!

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To see The Economist’s Global Debt Clock – an excellent resource with complete researchable database visit:

http://www.economist.com/content/global_debt_clock

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If you are looking for general articles about government debt by respected Economics Professor’s, with some practical comments and good quotes and charts, see my blog at:
http://www.scoop.it/t/politics-in-the-21st-century

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To see the letter President Barack Obama sent me last week, visit:

http://johnbrianshannon.com

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