Never Apologize for Prudence

I have a cold today. It came on very rapidly — literally, okay at 5 pm, dozing and feeling miserable on the couch at 7 — so perhaps it will depart quickly. I’m feeling better, but am still stuffed up. Oh, well.

Good news on the writing front: Erin received a second grant earlier this week from the Ontario Arts Council. Much appreciated.

I’m also pleased to say that my first column for the Community Editorial Board of the KW Record appeared this past Monday. It actually caught me a little off guard. I wrote it up and sent it in a week beforehand in case they wanted to call and ask me to make changes. They didn’t, and as a result, I almost missed the release of the column.

I’ve added a few more books to my online bookstore; primarily obvious contenders that would actually grace my shelves if I had the guts to run an actual business. If you need any of these titles, or are intrigued by some stuff I recommend, feel free to make a purchase. Amazon delivers quickly, and I get 5%.

I’m currently looking forward to the publication of an article on the Region of Waterloo International Airport in an upcoming issue of Business Edge, and there’s another article in the works…

Enough of the updates; on with the post:

Well worth reading is Bound by Gravity’s Andrew post on Canada’s surplus policy.

As you know, Canada has been maintaining healthy surpluses since our budget was balanced back in 1997. But bulk of the money paid to reduce Canada’s debt from roughly $570 billion to $501 billion was unplanned, and Andrew believes that this is a sign that Canada is overtaxed.

Andrew explains this better than I do:

The Debt Servicing and Reduction Account Act states that all unspent budgetary surpluses are credited to the Debt Servicing and Reduction Account if unused at the end of the fiscal year. (Although Scott Brison disputed the correctness of this practice three years ago, I was unable to locate sufficient evidence in his favour.) All funds allocated to the Debt Servicing and Reduction Account go directly towards paying down Canada’s national debt.

I believe, from 1998 onward, the planned debt reduction according to Liberal budgets was $4 billion per year, in the form of contingency and prudence funds, should the economy suddenly stall and government revenues take a dive. If these funds weren’t spent, then they reduced the debt. And, as Andrew said, any surplus beyond this planned $4 billion per year was also applied to the national debt.

And since 1997, our surpluses have ranged from $5 - 12 billion.

Unfair, says Andrew. Unplanned surplus money should be given back to taxpayers, possibly in the form of a rebate.

However, as stipulated by the Debt Servicing and Reduction Account Act all surpluses, not just budgeted surpluses, must be funnelled into debt repayment. Our surpluses have consistently exceeded estimations by enormous margins ($5+ billion) in recent years, which means that billions more tax dollars are going to pay down the national debt than were ever planned and approved.

There is one flaw in Andrew’s argument: the Debt Servicing and Reduction Account Act is an actual act of parliament, which means that it was approved by parliament, and presumably they knew what they were getting themselves into. And so the billions of unexpected tax dollars going to pay down the national debt may have been unplanned, but they were approved.

On the surface, it is hard to argue with Andrew’s suggestion that the Liberals are being somewhat dishonest in their budget reporting. For eight years, government revenues have been higher than expected. You might forgive one or two cases as accidents, but eight suggests a pattern.

Not that this criticism stings much, as I’m not a Liberal. But for Conservatives, whose 2004 election platform of tax cuts, tax transfers and spending increases depended upon the Liberal numbers being $90 billion short of reality over five years, and whose optimism was pooh-poohed, the fact that the 2004 budget shows them on track must sting a lot.

However, $4 billion in “prudence” represents just over 1% of the total government’s budget. I don’t know how safe I’d be if a one-inch cushion was all that protected me from an eight foot wall. One can argue that Liberal prudence goes beyond small contingency funds, and includes assumptions on how the economy will perform. The economy has consistently performed above Liberal expectations, and that has been the reason for the lions’ share of the surpluses.

The size of the Canadian economy dwarfs government spending and revenues, and a significant downturn could easily blow the $4 billion contingency fund away. A 1% increase in interest rates increases the servicing charges on our $501 billion debt by $5 billion. At the very least, that should be the size of our contingency fund.

Let us say that we went with the Conservative numbers from their 2004 election platform and planned to receive $90 billion more in revenues than we currently expect now. What happens if the economy does not perform to expectations? How would we react to our first unexpected deficit? Far more strongly than we have to our unexpected surpluses, I’d wager.

I agree with Andrew that the Liberals should be more honest about their economic projections. In fact, let’s take the numbers out of their hands and give the task of reporting on the government finances to an independent body. And let’s have all parties, not just the Liberals, issue multiple budgets based upon a range of assumptions.

All budgets are built on assumptions that the economy will grow X% in the coming year. That’s fine, but we should also know what happens if the economy grows by X+1%, or X-1%. What does the government spend the extra money on if the surplus is higher than expected? What does the government cut if the surplus goes away?

As dishonest as the Liberals are by putting down one set of assumptions and shrugging their shoulders when asked what happens if they’re wrong, the Conservatives were being equally dishonest with their 2004 election platform, and they were taking greater risks. If the Conservatives had come to power on the promise to cut taxes, increase military spending and cut little else, what would they have cut if their $90 billion in expected funds failed to materialize?

They never told us.

The Liberals, at least, can point to the Debt Servicing and Reduction Account Act and say that they did tell us. And if we don’t like it, our job in this minority parliament is to put forward bills to change the Act, which is what Andrew suggests.

But I see no reason to apologize for prudence.

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