Debt deflation danger

Canada's Conservative government, that does not believe in government, has a plan to reduce public services. As announced in the budget it intends to cut public service jobs, and reduce the rate of increase in our already reduced public spending. The projected deficit (aka the all purpose excuse) of over $50 billion was invoked as the rationale.

Add a new deficit to the sum of past deficits and you get the government debt. In the fiscal year 2008 to 2009 the carrying costs on the federal debt [2] were the lowest in 25 years. When measured as a percentage of government revenue, in the last fiscal year only 13 per cent of revenue went to pay the cost of serving the debt of the Canadian government. This compares with 37.6 per cent in the recession year 1990 to 1991.

What the debt costs matters. In this case, low debt charges shows there is no rationale for reducing the number of public servants or cutting back on needed spending increases for health care, education, job training, rapid transit, environmental protection, recreation, amateur sport, cultural activities, employment insurance and income security in retirement. Notably there is considerable room for new borrowing to fight unemployment, as an estimated 800,000 people see their E.U. benefits expire.

Unemployment can be reduced through government policy. The great breakthrough in 20th century economics was that mass unemployment, as in the 1930s, was unnecessary. Indeed, from the perspective of macro-economics as elaborated by John Maynard Keynes, and his many prominent followers, the great depression was caused by government austerity policies of the type Canadians are supposed to welcome today.

What we learned 80 years ago was that a shortfall in government revenues was a symptom of a failing economy, not the cause of the downturn. Trying to engineer a recovery by making spending fall into line with revenue only made things worse.

In last week's budget the Conservatives willed us a new age of austerity [3]. We know it is bound to make things worse for already unemployed Canadians, and add to their numbers. Alarmingly, the Liberals have shown no sign they understand the link between government spending and employment creation; they have no spending program to propose in place of austerity.

In its regular Fiscal Monitor [4] the Department of Finance now refers to government spending as "expenses" instead of expenditures. In other words government do no invest in education or health care, they add to our expenses by spending to meet our essential needs. This outlook is dangerous to our collective health as a society.

Where debt becomes a problem is when indebted students cannot find ready employment upon graduation, despite expensive advanced education. Lone parents with debt, who lose their jobs thanks to government cuts, will have problems keeping their cars or condo apartments, or making credit card payments.

The Vanier Institute of the Family recently reported [5] on the high indebtedness of Canadian households: as many as 1.3 million Canadian families could be in over their head. In the last 10 years, family debts grew twice as fast as assets, the report points out.

Faced with economic uncertainty, indebted families cut back on spending to pay down the debt. This is an example of what should most worry us: debt deflation. If consumers cut back to pay down debt, businesses will also decide to pay down debt, rather than invest in new production, because businesses anticipate that consumers are not going to buy. The vicious spiral of households and businesses reducing spending because of indebtedness is what makes a recession into a depression. That is the debt deflation danger the Conservatives are blissfully ignoring.

Under current circumstances, the worst thing a government can do is cut back its own spending, because that only makes debt deflation worse. Indeed it takes out of play the only source of new spending in the domestic economy, virtually assuring us of economic stagnation or worse.

Duncan Cameron writes from Vancouver.

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