Why Borrow?

April 23, 2006 1:59 AM

According to this site, Canada has piled $570 billion in debt between years 2000 and 2004. My understanding was that our government has been running a surplus since 1997. So, how did this happen?

The dept is defined as: 'total public and private debt owed to nonresidents repayable in foreign currency, goods, or services.'

So, could this be mainly private debt?
Please help me understand how a country with surplus budget ends up with $500 bilion in debt?

posted by lenny70 to law & government (29 comments total)

You have money to lend. Do you lend it to:

A. Some broke jerk.

B. Some rich jerk.

?
posted by evariste at 2:46 AM on April 23, 2006

Canada has an operating surplus but it still has a debt. They take in more money than they need to run the govenrment but that doesn't mean that the debt magically goes away. IANAE but I just read your second link and it told me this.

What does the government do with its surpluses?

It pays down its debt. Since the debt peaked at $562.8 billion in 1996/97, the government has slapped down $61.4 billion on its accumulated debt. As of Oct. 13, 2004, that debt officially stood at just over $501 billion.
posted by rdr at 2:47 AM on April 23, 2006

So the $1.9 bilion debt in 2000 (in my first link) is a typo?
posted by lenny70 at 2:54 AM on April 23, 2006

If you head over to the Canadian Government's Canadian Economy Online site, you can see that the current federal debt is at about $500 billion, which is almost in line with the CIA world factbook figure. However, if you click on the link, you get a history of the debt, and that is definitely not in line with the 1996 CIA world factbook figure presented. The CIA figure is $253 billion, while the actual figure from the Government of Canada is $554 billion. The history presented on the Government's site shows the debt steadily decreasing, which would be a logical result of a period of surpluses.

The Department of Finance's web site also says "As a result, the federal debt was $499.9 billion at the end of 2004–05, down $63.0 billion from its peak of $562.9 billion in 1996–97, resulting in interest savings of over $3 billion annually."

I don't know why the CIA figures are out of whack. There's no mention of sources that I see. And the Government of Canada, well, it's the Government's debt, and it's the Government's figures. It's hard for me to believe they'd be off by $300 billion in 1996. And I just noticed that the graph you linked to has $1.9 billion for year 2000, right there in the center. The graph does say it's external debt, but the Government web sites make no mention of external vs. internal, they just say that "the net federal debt is the gross federal debt minus the federal government’s financial assets such as loans, investments and foreign exchange accounts".
posted by splice at 2:59 AM on April 23, 2006

It's possible that while they claim to run a surplus, they are tieing their money up in capital - eg if you build a $100 million government building, the $100 million is not counted as spent, the building would go on the balance sheet as a $100 million capital asset (to be slowly depreciated over time).

This would likely result in a difference between the net debt and gross debt as mentioned above.
posted by scodger at 3:57 AM on April 23, 2006

A lot of it has to do with how you account for the debt. The only debt figure that really counts is the one to GAAP standards... GAAP is Generally Accepted Accounting Principles. The US government claims, for instance, to have a debt of 'only' 9 trillion dollars, but in actual fact, the debt by GAAP standards will exceed fifty trillion dollars late this year. That's over $375,000 per working adult.

Basically, there's lots and lots of games that can be played with government books. Late in the Clinton administration, for instance, it was claimed that the government was running 'surpluses', when in fact it was running very large deficits.

The way they kinda-sorta get away with this is by using cash-based accounting instead of accrual-based accounting. Accounting on a cash basis is pure bullshit for a complex entity like a government. It just measures 'money in this year' minus 'money out this year', and that's the surplus or deficit. Of course, governments take on many long-term debts, and cash-based accounting doesn't deal with that at all. If you promise to pay someone a million dollars a year for fifty years, in exchange for five million dollars now, a cash-based system records only that you made five million dollars this year. Accrual accounting is the proper way to handle that kind of situation; you actually took a 45 million dollar loss on that deal.

Cash-based systems, for entities the size of national governments, are simply a way to lie to the public about the true state of affairs.

Somewhere in your government, someone will likely have compiled the picture of Canadian finances to the GAAP standard. Find that, and you'll get the real answers. I've been looking a bit for a few minutes, and it appears that Canada has a slightly different GAAP standard. This report from your Auditor General appears to be a pretty good rundown of your government's financial state.

It's not wonderful, from what I can see. $700 billion in liabilities, $200 billion in assets, $200 billion per year in revenue. I'd guess that's just barely tenable; you can support and eventually pay down that much debt, but only just. You have no room at all for significant new spending.

Unlike the US, you don't appear to be outright suiciding through overspending, but from what I can tell (I'm not an accountant, mind) you are in pretty deep.
posted by Malor at 4:13 AM on April 23, 2006

To piggy-back off of Malor's excellent post:

This was linked to in MeFi a while back deep inside a thread. I can't find the original poster to thank them specifically, but I can say that it offers a really, really interesting look at the financial chicanery that goes on in the U.S. to make our GDP/Debt ratio look so rosy. Luckily for you, Canada doesn't use these kinds of heuteristics to "model" their income/debt, so while the figures you found might be off a couple hundred billion, they're not so grossly distorted as to be useless (unlike in the States).
posted by Civil_Disobedient at 6:05 AM on April 23, 2006

At this point, virtually all US statistics with regard to the economy are bogus. Slick Willie implemented many of these changes, and we're all intensely aware of how much Bush values the truth.... it's gotten much worse under his administration. At this points, words have been redefined to the point of uselessness. For instance, per the government, we ship something like 500 billion dollars' worth of computer goods every year, because computers are faster than they used to be. (they actually have the galls to call this 'real' dollars, if you can believe it.) The actual figure is more like 50 billion, although I'd have to go look it up to be sure. They do the same kind of monkeying with essentially every statistic in government, especially inflation. They don't even measure inflation with the same goods anymore.... now, they substitute goods based on price. If beef went up 10%, but okra is down 15%, well, everyone must be buying lots of okra. No inflation!

As far as I can tell, the ONLY trustworthy source left in the US government for numbers is the GAO, and they just cover internal government budgets. They complain ceaselessly that nobody is doing proper accounting and that tens of billions of dollars are disappearing down ratholes. Everyone ignores them.

Like Civil_Disobedient is saying, don't use the US figures to compare against. They're not a good benchmark, because they're lies, pure and simple. Just run the numbers on their own.
posted by Malor at 6:20 AM on April 23, 2006

Indexmundi.com is wrong. Bad data. See the Finaance Canada site for better debt data.

There's a little bit of complexity. The amount the government owes in the form of future pensions increases each year. This is not bad debt, to my mind - I don't mind the government acquiring the future obligation to pay pensions. The amount owed in other forms of debt has been decreasing each year.
posted by jellicle at 6:31 AM on April 23, 2006

jellicle, debt that's used for anything other than generating wealth is 'bad' debt. Taking out a loan to buy a power tool (or a factory) is fine... you'll be able to generate revenue and pay off the loan. That improves the economy and, in general, makes life better.

Taking out a loan to buy a projection TV, on the other hand, isn't. The money spent there is just gone, consumed. But it still has to be paid for.

Like it or not, pension obligations are consumptive debt. Some social programs can certainly be considered investment (training, etc), but pensions... nope. Pure consumption. It's 'bad' debt by any reasonable measure.

I'm NOT saying the Canadian government shouldn't do that. I think it's nice that it does, in fact. Just be very clear, with yourself and others, about what that obligation actually is.
posted by Malor at 6:45 AM on April 23, 2006

Wow. I'd love to see the Federal government only a 500 billion in debt.

malor suggests:

Late in the Clinton administration, for instance, it was claimed that the government was running 'surpluses', when in fact it was running very large deficits.

Those current account surpluses were real, and the national debt WAS decreasing under Clinton's watch. The reason was responsible tax increases that were put in place by him and Congress and some level of fiscal restraint.

These were unwisely eliminated by the Bush monarchy, but regardless, even if you believe that the accounting methods are lies, which I don't completely agree with, the methods haven't changed. Now, those same methods report catastrophic red ink. If they were overoptimistic during the Clinton years, then they show what a mess we are in now even more starkly.

The word 'unwisely' I use because management of the fiscal health of the nation by bUSH has been in the same mold as his management of everything else... short term is all that matters. It has been an umitigated disaster for the 20+ year time frame, in every area from environment to world peace. These were supposed to be the people you could trust with the checkbook.
posted by FauxScot at 7:01 AM on April 23, 2006

Our overall national debt increased every year during the Clinton administration. They were just playing games with the books. It had nothing to do with actual debt paydown.

Go look at the GAO numbers if you don't believe me. But fortify yourself with some booze first. "The World According to GAAP" is a scary, scary place.

Bush is enormously worse, mind you. Our real debt stood at about 20 trillion dollars in 2000. (per GAO). It will exceed fifty trillion dollars in 2006. Bush has incurred more debt than all prior presidents put together.

However, the fact that Bush is insanely terrible doesn't, by any means, make Clinton 'good'.

Anyway, this is supposed to be about CANADA, so I'm not going to talk any more on this here.
posted by Malor at 8:24 AM on April 23, 2006

And thus the supreme, underlying flaw in all representative democracies: you get people who are representative of the democracy.
posted by Spoonman at 8:28 AM on April 23, 2006

Pension obligations are not "consumptive debt". The government is paying (immediately and deferred) compensation to its employees, which presumably do something useful for the country. This is an investment.

Suppose that Canada hires an employee to build roads. He builds 1000 miles of freeways in 30 years and then retires. Is it not likely that the benefits from his service outweigh the present and future costs of his pension?

Now, it may be that not all of Canada's employees are actually productive (nor GM's, nor Ford's, nor IBM's.....). But we have no evidence of that in front of us, and it's a different question. (It may also be that a purchase of a power tool or college education, both generally used as examples of "good investment", don't actually turn out to have benefits in specific cases.)

Canada is actually in decent fiscal shape. Canada's debt is about 36% of GDP currently (and decreasing), while the U.S. debt is running at 65% of GDP and increasing. Measuring against GDP is a good way to measure debt because GDP is a good measure of the "ability to repay".
posted by jellicle at 9:21 AM on April 23, 2006

Sorry to derail, but.. Anyone know where to find historical GNP numbers for Canada? Historical GDP is easy to find, but I'm interested in the comparison..
posted by Chuckles at 10:03 AM on April 23, 2006

Okay, I may have found it - GDP and net product. The numbers aren't very interesting though.. Based on the definition of GNP and GDP I thought the comparison should reveal something about foreign ownership, but I guess not.
posted by Chuckles at 10:35 AM on April 23, 2006

Unlike the US, you don't appear to be outright suiciding through overspending, but from what I can tell (I'm not an accountant, mind) you are in pretty deep.
posted by Malor at 7:13 AM EST on April 23

Not anymore:

On an accrual basis, the federal debt as a percentage of the economy is projected to fall to 35 per cent in 2006–07, down from its peak of 68.4 per cent in 1995–96.

In contrast:

As of April 18th, 2006, the total U.S. government debt was $8.4 trillion. The World Factbook estimated the US's 2005 GDP at $12.41 trillion, ranking it at the time as the 35th most indebted country in the world by percentage of GDP at 64.7% of GDP.
posted by Dasein at 10:53 AM on April 23, 2006

GDP is irrelevant. Really. That's just a bullshit number at the BEST of times, and with the modern redefinitions, god only knows what it means.

Income for a government is taxes. The Canadian government has a total income of about 200 billion. With liabilities of 700 billion, at 5%, that's about 35 billion dollars a year in interest. It has 200 billion in assets. I don't know if those are income-generating assets, but I doubt it. Generally, government assets tend to be static... buildings, parkland, like that. They have capital appreciation, but no upfront income to offset the liability to buy them. So it's likely you're paying close to 35 billion/year in interest.

In other words, 17.5% of your entire budget goes simply to service that debt, without paying down anything. That can definitely be serviced, but it's a heavy load.

To put it in perspective, if you made 40K year take-home, or 3333/mo, you'd have a total debt of $140k. At 5%, that would be an interest payment of $583.27 off the top, leaving you 2750/mo. To pay off the debt in 30 years, like a mortgage, you'd need to add another $388/mo, leaving you $2362 as your 'real' income. That's a pretty substantial load. It's obviously serviceable, and it will get easier in later years as the principal is paid, but it's still quite a bit. And that's assuming 5% interest; 8% would probably be a fairer number to use, over a 30-year period.

Another way to look at it: if the Canadian government had no debt, they could cut your taxes by 31%.

The US debt will break 50 trillion dollars this year... 500% of GDP. $375,000 for every working adult. Here's the actual text of a recent report from the GAO. The World Fact Book is a poor source.
posted by Malor at 11:51 AM on April 23, 2006

Malor, what on earth are you talking about? 50 trillion dollars? Are you out to lunch? From the report you linked:

The federal government’s gross debt was about $8 trillion as of September 30, 2005.

That's in line with the world factbook. Where are you getting your numbers? Is this some kind of weird troll?

As for this: GDP is irrelevant. Really.

This is just dumb. Debt-to-GDP ratio is everything, because it speaks to how easily the government can finance its debt. As GDP goes up, so do revenues. It means absolutely nothing to say that a government has $100 billion in debt. You have to know how big the economy is to know whether that's trivial (say, for the US) or crippling (some poor sub-Saharan country). The point is that whether the government can afford to tax its citizens enough to pay its debt service charges depends on the relative size of the economy to the debt. Yes, Canada's debt service charges eat up a fair bit of revenue, though as you can see from Figure 3 here they used to consume about twice as much of the federal budget. We're in better shape up North than we have been in a long time; the US is in worse shape than it has been in a long time.
posted by Dasein at 1:03 PM on April 23, 2006

As for this: GDP is irrelevant. Really.
This is just dumb.

I believe Malor was trying to say that the stated numbers for the GDP are irrelevant, since the methods used to determine it are suspect. Not that actual GDP is irrelevant, because as you say, the (real) debt to (real) income ratio is essentially a country's WeAreFucked variable, and ours is rather high.

50 trillion dollars? Are you out to lunch?

From the rest of that quote that you failed to mention:

This number excludes such
items as the gap between the present value of future promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other liabilities, commitments, and contingencies that the federal government has pledged to support. Including these items, the federal government’s fiscal exposures now total more than $46 trillion

posted by Civil_Disobedient at 1:54 PM on April 23, 2006

Okay, but "fiscal exposures" or "liabilities" and "debt" mean two different things. You change the discussion completely if you start including the total value of all non-discretionary spending over x many years. The point about debt is that it eats up money that one would otherwise spend on those programs. So if you start including the cost of those programs as "debt," then you miss the whole point of the discussion in the first place.
posted by Dasein at 2:00 PM on April 23, 2006

That's not at all true, Dasein. In accounting, debt is a future liability. We will have to come up with that money eventually. And that number is in NET PRESENT VALUE. It means we need to have 46 TRILLION dollars in the bank, RIGHT NOW, earning about 6% interest, to cover all the liabilities we have.

if I promise to pay you a million dollars next year, that's a liability. In a bullshit cash-based system like the US Government uses, it's not on the books yet, so my "debt" is zero. But in reality, my debt is slightly less than one million dollars. (since I can invest a little less than a million today to get the full million to pay you next year.)

The total commitments that have been made by the US government will exceed fifty trillion dollars this year. That's fifty trillion dollars in TODAY'S MONEY. That's with the future interest already included. And as the GAO is saying, we CANNOT grow our economy enough to pay this off. To actually pay for all the debt we've accumulated, taxes would need to double.

That's our real debt. It's not just money we've borrowed, but also promises we've made.

Note that the US government forces corporations to keep their books using GAAP. The 50 trillion dollar figure is what you get if you simply make the government play by its own rules.
posted by Malor at 2:30 PM on April 23, 2006

Oh, and if GDP was a real number, instead of a political one... sure, it would matter. But it's pure politics now. It's much better to simply look at tax receipts and the growth rate of the economy, if you can find good numbers for that.
posted by Malor at 2:36 PM on April 23, 2006

It means we need to have 46 TRILLION dollars in the bank, RIGHT NOW, earning about 6% interest, to cover all the liabilities we have.

What? No. It means that the government needs to collect 46 trillion dollars over the time period discussed. If they can do that with their revenue - no debt. If they can't, they go into debt to pay it. You're confusing future liabilities with present debt. By that logic, a government with no outstanding loans and balanced books still has debt, which is simply wrong.
posted by Dasein at 2:38 PM on April 23, 2006

No. It means the PRESENT value of our liabilities would require 46 trillion dollars, invested at 6% interest. They're already including inflation and interest in these figures. We have to come up with 46 trillion in TODAY's money, not money twenty years from now. (by then, it'll be way way more.)

In other words, by the time we actually PAY the debts, the actual dollar figure could easily exceed 100 trillion or more.

Accountants are clever. If they say you're in debt 46 trillion dollars, you really are. GAAP is designed to prevent weaseling.

By that logic, a government with no outstanding loans and balanced books still has debt, which is simply wrong.

If it has future liabilities without expected revenue to cover them, it has debt. If my books are otherwise balanced, and I have to pay you a million dollars next year, I'm in debt a little less than a million dollars.

Our anticipated outflows exceed our anticpated inflows to such an extraordinary degree that the GAO says we need $46 trillion in the bank to pay for everything. That's debt.
posted by Malor at 4:22 PM on April 23, 2006

If it has future liabilities without expected revenue to cover them,

So you're saying that future revenue is accounted for in the 47 trillion? Very interesting.. So, every time there is a tax cut, that debt figure takes a massive jump, since the cut is projected out over the next 50 years?

That thinking makes a lot more sense for business than it does for government. The government can change a lot of policy in short order that will have massive effects on the balance sheet, business can't..
posted by Chuckles at 4:41 PM on April 23, 2006

Yeah, that's 47 trillion MORE, above and beyond all additional tax revenue we're expected to generate, corrected for expected inflation. It's the net present value of all unfunded liabilities. If taxes are cut, that number goes up fast, although they do raise their expectations of future tax revenues to account for increased growth from a lower tax burden.

GAAP makes sense for ANY complex financial entity. Maybe governments in particular. Because of all the games they can play, the only way you can really measure the government's fiscal policy is through accrual accounting. Even GAAP involves some guesswork, but it's a hell of a lot better than cash-basis bookkeeping.

The only real difference between government and business accounting is that the government can raise its revenues at gunpoint. Doing that, however, damages the economy; the higher the tax rate, the slower the economy grows. If they raise too much, it goes into contraction. Extracting money today means less money to extract tomorrow. It's not a panacea.
posted by Malor at 5:55 PM on April 23, 2006

The government can also lower its costs at gunpoint.

I'm no accountant, but.. Businesses don't presume future sales that aren't contracted right? Like, if you have a contract to supply something, you can add that. If you think your new marketing campaign is going to be a success, or if you think your new product will have a big uptake, you don't get to assume future income from those things, do you? Isn't that how Nortel got in trouble?

This process goes from being a balance sheet to a future guessing exercise very quickly. One is very interesting and informative, the other is a stupid joke.

Well, like I say, I really have no idea, but..
posted by Chuckles at 6:12 PM on April 23, 2006

think your new marketing campaign is going to be a success...you don't get to assume future income from those things, do you?


You'd think that, but pretty much every company I've ever worked for has spent money based on unsubstanciated, potential, estimated projected earnings. I've worked for more than one company that did a huge hiring spree based on marketing's suggestion that their plan for next year will bring in 30-40% more sales. This usually occurs just after they lay off a huge contingent of personell hired based on the previous year's marketing plan.
posted by Spoonman at 8:37 AM on April 24, 2006