Mortgaging our children

Votre blogueur va régulièrement, vous rappelez que l’État-Providence est un État d’immoralité.

Il y en d’autres, qui vous le rappellent, même si beaucoup d’entre vous jouent au déni.

Extrait de: Mortgaging our children, Jack Mintz, Financial Post, Nov 27, 2012

Future voters have no say when politicians run up our debts

Last week, the Financial Post ran some pretty interesting articles on retirement income, reminding Canadians that we should be careful not to take on too much debt. What was missing from the discussion was the biggest elephant in the room: public borrowing that has ballooned after the 2008-09 financial crisis.

When the chickens come home to roost, today’s young will need a bigger nest egg just to cover the taxes required to retire today’s burgeoning government liabilities. This isn’t fair at all.

Unlike Canadian households, politicians have little incentive to cut back debt. If you and I get into bankruptcy, we pay the price by losing our house, car and other assets. If the country gets into excessive debt, politicians don’t pay. The future voters are left the tab and they have no say in electing today’s politicians.

Debt-laden countries get into financial trouble only when markets are no longer willing to hold the country’s public debt and interest rates spiral upward — call it the Greek phenomenon.

In other words, we are witnessing a major transfer of future wealth to today’s voters.

And few business leaders, unionists, students and NGOs pleading for their special-interest programs recognize that they are being bailed out by the youngest generation.

What is even worse is that we don’t talk about the correct definition of debt. Most economists focus on official public debt ­figures, which, by definition, arise from the accumulation of past deficits when ­governments spend more nickels thanthey earn.

Current public borrowings — government bonds sold to the public — are much bigger than we typically think. Public borrowing also includes public pension liabilities, government guarantees and other forms of public commitments.

Currently, total government financial liabilities net of financial assets (including assets held in the Canada Pension Plan) are over $850-billion. But still other important borrowings are not included, such as the future liabilities associated with the social security system.

A large unfunded liability arises from medicare. Since the largest health expenditures arise close to the end of one’s life, future health-care expenditures are to be covered primarily from taxes paid by the working population. If people had to sock away some money now to pay for their health care after retirement, they would need to borrow a pile of dough. Herb Emery in a University of Calgary School of Public Policy paper recently estimated the size of this liability to be $470-billion, which will mostly fall on those born after 1990.

This, however, is not the end of what is truly debt. Canada is a resource-rich country, but we are borrowing billions from future taxpayers every time we sell off non-renewable assets to fund current public spending, rather than saving royalties and other levies in financial assets, as done in Norway.

The debt march continues on this year as we witness political leader after leader talk about the need for borrowing. The latest comes from the most heavily indebted province, Quebec, whose head-in-the-sand budget does little to deal with its unfunded liabilities. Total per-capita provincial debt as a share of GDP in 2011-12 is $21,400, the highest in the country (followed by Ontario at $17,600).

Despite Quebec’s repeated forecast that its debt burden will fall and its budgets will soon be balanced, the predictions are largely based on fanciful expectations that it will control spending. With its hikes in taxes on skilled labour while it engages in Third World tax policies such as expensive and ineffective tax holidays and other various targeted subsidies, Quebec is unlikely to grow much this coming year.

An IMF SWAT team really should see Quebec Finance Minister Nicolas Marceau about the need to not only control debt but also to put in the macro policies needed to generate growth. With the Quebec Pension Plan in serious deficit and the health-care system under strain, the current government instead pleads for another federal bailout while sitting on its undeveloped rich shale gas resources.

But let’s not be too hard on Quebec. Except for Saskatchewan and Newfoundland and Labrador, provinces are boosting up debt to fund capital spending. This includes the richest one, Alberta, whose politicians are still praying for balanced budgets after running a string of deficits for four years and counting.

In principle, it is not wrong to fund capital expenditures with some debt, since infrastructure benefits not just existing populations but also future ones. However, Alberta is already borrowing far too much. As it draws down its net financial assets with a roughly $3.5-billion cash deficit, total net financial assets will fall this coming year to a quarter of the 2007 level. The health-care deficit would likely add a whopping $60-billion to debt.

On top of it, the province is borrowing $11-billion annually by cashing in on royalties from non-renewable resource assets to spend on public services. Instead of announcing more debt, Doug Horner, Minister of Finance, should come to grips with Alberta’s spending and borrowing binge.

The minister who should show the most leadership is federal Finance Minister Jim Flaherty, who has seen federal debt grow under his watch by over $100-billion, largely due to the Great Recession. With weaker commodity prices, revenues are stalling so that federal deficit reduction has slowed down demonstrably. At least, the minister announced this past week that he will cut spending further to balance the books by 2014-15, putting us back to the same year as originally promised.

But with large unfunded pension and health-care liabilities, the federal government has some way to go.

I do find it ironic that politicians chastise the public for not saving enough. They should really get their own fiscal house in order. After all, those who live in mortgaged glass houses should not throw stones.

Jack M. Mintz is Palmer chair at the School of Public Policy at the University of Calgary