Canada in deficit... NOW

Here is a working link:

[url=http://mikewatkins.ca/]http://mikewatkins.ca/[/url]

Michael,

I see where you are going with this and I have every reason to believe you.... The Finance Minister did it in Ontario and now he's most likely done it nationally.

What is your background?

[ 08 October 2008: Message edited by: Mojoroad1 ]

I just emailed the Canadian Centre for Policy Alternatives (and their big gun economist) to look at the numbers. Hope they do!

Thanks, Michael!

[img]http://64.21.147.48/tv-20081008-011145.gif[/img]

[img]eek.gif" border="0[/img] [img]eek.gif" border="0[/img]

MW I mentioned something a few weeks ago about this. The sell off of the spectrum to the tune of 4.1 Billion is the only reason they aren't in deficit TOTAL. Just like the last year of the Harris government, they sell off public assets to cook the books to make it look like they are in the black while operating in the red.

Excellent analysis! This could make things very interesting. [img]smile.gif" border="0[/img]

Any MSM pick-up?

This is damning for the Cons.

However, it puts the other parties in a difficult predicament, as a $20B operating deficit for Fiscal Year 2009 would foreclose some policy options for 2009-10 and beyond.

Ending the Afghan mission sooner than 2011 might save $250M a month, and killing subsidies to the tar sands might recoup $1.2B a year. I would guess there is another $2-3B a year in other relatively ineffective subsidies to big business, and maybe $1-2B a year in cost savings by streamlining programs and delivering existing programs more efficiently. That makes for $7-9B in possible savings.

We probably aren't actually in deficit this year, but that's only going to be because of the $4 billion sale of wireless spectrum earlier in the year. Next year, however....

Actually the $20B of liquidity would be provided by the Bank of Canada, not the Federal Government.

According to Mike's analysis, the Harper government appears to be running a negative cash flow year to date, when they should be running a positive cash flow year to date (with more positive months than negative months).

This is the first time in ten years the Federal Government has run a negative cash flow year to date (6 months in the fiscal year, 9 months into the calendar year). Harper/Flaherty are almost certainly cooking the books.

The savings opportunities that I identified should be just as palatable to an NDP stalwart as a Liberal stalwart. [img]smile.gif" border="0[/img]

Since the NDP plan on spending about 40 billion more than the Conservatives, are you sure it is a good idea to trumpet the fact that Canada is in deficit and, if enacted, Layton's plans would put Canada much deeper in deficit?

How come no one is picking up on this? I have tried to spread the word.

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Originally posted by JimWaterloo:
[b]How come no one is picking up on this? I have tried to spread the word.[/b]

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Yeah, there was [url=http://www.theglobeandmail.com/servlet/story/RTGAM.20081008.wflaherty100... article [/url]in the Globe and Mail where Flaherty said "No deficits on his watch" and the comments from readers accusing him of lying were just brutal. I was sure the Cons were going to be accused by the other parties of mismanaging the country back into deficit through tax cuts and war spending, but neither Layton nor Dion have managed to make the "lost the surplus" case stick to Harper.

Canadians should not have to endure program cuts to pay for militarism, corporate tax cuts and the "grey shift" of cutting 2 cents of tax off every litre of diesel fuel. Because that appears to be the coming Conservative agenda as presented this campaign.

Okay, accumulating new debt doesn't mean you have a deficit unless it's operating debt used to cover an excess of expenditures over revenue. If the debt is used on capital expenditures it's not an operating expenditure. E.g. when someone mortgages a home we don't say that they are in a deficit position unless the value of the home they have mortgaged is less than the amount of debt owed on the home; this is a capital deficit. If you owe $100 on your home but it's only worth $90, you have negative equity of ($10) and ergo a capital deficit, not an operating deficit. The bank would call this a negative net worth – but that doesn't mean that you can't cover all of your annual expenditures with your annual income (an operating deficit); an operating deficit is when expenses exceed revenues.

If you owe $90 on your home and it's assessed value is $100 – you have $10 in capital equity. You have debt, but you're not in an operating deficit position. If you have to borrow money to make the mortgage payment – well that's a problem.

Selling spectrum shouldn't be treated as a revenue; it's a gain because what was sold is a capital asset. If it's been categorized as an operating revenue than that's erroneous – but someone should post a link indicating the proof. The cash from the sale will show up on a cash flow statement under investing activities, that doesn't mean the government is including the funds as operative revenue.

The financial source/requirement figures are essentially a cash flow statement – which combines operating cash, investing cash and financing cash. E.g. if you receive cash from selling capital assets it still shows up in the cash flow statement (under investing activities), if you receive cash from issuing t-bills then it shows up as a source of cash as well (under financing activities). Conversely, purchasing capital assets will show up as a use of cash (under investing activities) and paying off t-bills will show up as a use of cash.

Revenues and expenses are not the same as source/requirement figures. They are not. The so-called 20 billion dollar operating deficit is not an operating deficit – it means that the feds used $20 billion more cash then they've received so far. That is not an operating deficit. It's the same as using your savings from last year this year. Let's say you have $100 in savings from last year and your income this year is $50. If you spend $50 on living expenses and entertainment this year, you break even. If you use $25 of your $100 savings from last year, you have used total cash of $75 ($50 current year income plus $25 savings). Now your use of cash exceeds current year cash but that is not an operating deficit and it's not the same thing as using your credit card to spend an extra $25 on eating out and entertainment; in which case your operating deficit would be ($25).

If you want to buy a car for $25 in the same year and you take out a loan for $10 and pay $15 cash for the car if will affect your cash flow this way:

Use of cash: ($25) new car purchased (investing activity)
Source of cash: $10 loan (financing activity)
Change to cash balance: ($15) – your cash balance decreases by $15.

That is not an operating deficit even if you dip into your savings for the $15 cash used in the purchase.

Another example using a household: If I am expecting an annual income of $120 broken up over 12 periods, I will receive $10 per period. I need access to that money now and typically have an annual surplus of $10 (which I put into a savings account) – so in a typical year I have $120 in income, $110 in expenditures and $10 in savings/$10 surplus. I've maintained this budget for 10 years, so I have $100 in the bank which is the same as $100 in equity and a $100 “cumulative operating surplus.”

This year I decide that I want some of my money sooner to take advantage of a sale that ends next week. So I borrow the money short term via a short-term demand loan (note payable) for $10 with $1 (10%) interest; this interest rate is lower than the interest I'm generating in my savings, so it makes more sense to borrow the money. This sale is on goods & services I normally purchase any how that I normally pay $15 for in a year. So by borrowing money now, I can save $4 even after paying interest – I will pay $10 for the goods plus $1 interest versus $15 normally. This is not a deficit just because I borrowed the money.

It will be a deficit if I lose my job in month 11 and make say $20 less than I anticipated. Now I've only earned $100 but spent $111 – my usual annual expenses plus $1 in interest expense. So I've overspent by $11 for the year and have an operating deficit of ($11). I also “erode” my equity by $11 and instead of $100 in equity (savings), I now have $89 in total equity because I had an operating deficit.

This is not semantics, it's accounting and it's perfectly legitimate; this isn't Enron & WorldCom part 2. The NDP, the Liberals & the Greens would all do the same thing. And Harper was probably nervous because he's not an accountant and can't explain the difference between accruals, operating expenditures, capital investments, how sources and uses of cash are classified versus how balance sheets are presented, etc. How are you supposed to explain this in like 30 seconds to anyone who isn't very familiar with accounting?

None of this means that we won't go into deficit this year; I'm just contesting that we already are. And I'm not disputing that Harper has plans to cut spending (even though he announced something around $8.5 billion in pork barrel spending before the election according to the Canadian Taxpayers Federation); he probably does plan to make cuts to areas he loathes like the arts, social spending, etc – I'm not disputing that.

Sorry folks, but you are waving around a red herring with this operating deficit discussion and that's why the Liberals or NDP haven't jumped on it.

Another thing. The government is basically run on the cash basis of accounting because a lot of what the government does is on a year by year basis with not much in the way of long-term asset buildup or drawdown.

Consider health care and education as an example; you can't realistically do those on an accrual basis with any kind of accuracy. How do you capitalize the human capital built up by healthy citizens and well-educated ones, to boot? You can't, and the government doesn't even try. It just books the expense for any given year in that year and calls it a day.

This is heretical to the "run-it-like-a-business" school, but I believe the government should continue to run on the cash basis of accounting because of the inherent lack of a good method for accrual. How do you accrue the cost of a working law enforcement system, most of which is an operating expense (payroll)? Or national defence, most of whose assets are specific to the military and do not find ready civilian use ("hardened" computers are basically novelties to the civilian sector, for example, except in restricted cases like power plants or other mission-critical places where an EMP or the presence of radioactivity must be guarded against)?

All the above having been said I love how Harper is now reluctantly admitting to the need for deficit when he and his self-righteous gang of total assholes were caterwauling and screaming about the SLASH THE DEFICIT SLASH EVERYTHING NOW thing back in the 1990s when they didn't give a good goddamn about the damage it would do to Canadian society to hack through social safety net spending.

Oh no, they were full of the macho can-do damn-the-consequences attitude. Never mind that the impact is disproportionately felt on [i]women[/i] when the social safety net frays. But then some men have always been willing to disregard the needs of women when convenient.

I’m not adverse to putting a higher tax on the super rich, but they’ll just move their assets elsewhere and change their residency. Plenty of billionaires have moved their assets & residency from one country to another in order to avoid paying tax. If they are really calculating about it, they don’t even have to move – they can just hire a suit who knows how to legally set up various blind trusts, postal boxes in tax havens and minimize taxes payable! And there are no trillionaires in Canada – how can you honestly say such a thing given that our national GDP is only about $1.25 trillion dollars? There are no trillionaires any where in the world or in recorded history, even after adjusting for inflation! Even if you go on the basis of the largest companies on the planet – there aren’t any with assets of one trillion dollars – Exxon-Mobil is the largest with somewhere in the nieghbourhood of $400 billion. The largest sovereign-wealth fund hasn’t even hit one trillion dollars yet – it’s held by the Abu Dabai Emirate of the UAE and it’s around $800 billion! My point is, there are some pretty strange notions around here with regards to how assets are valued, money is recorded, wealth is recorded, what money is, etc.

I don’t disagree with the general premise of this thread; I don’t think Canada should run deficits – if Harper hadn’t made so many tax cuts, there would be more revenue. I do not agree with MW’s analysis of the so-called deficit reported by federal Finance in the first quarter of the year; it’s not a deficit, the feds have had a decrease in the amount of cash on hand in the first quarter, which is not a deficit. The federal government moved to an accrual basis of accounting somewhere around 2002 if I recall correctly. There is no reason why governments can’t & shouldn’t use accrual accounting. It’s not just for business – the point of accruals is to adhere to matching principles: E.g. if you have expenses that are used to generate revenue, you record it around the same time that the revenue is generated. If I use my car to deliver pizzas, the depreciation expense, fuel expense & maintenance expense associated with those deliveries is journalized against the revenue I receive in the same period. That’s accrual accounting. Accounting on a cash basis makes no sense if you have debts to pay, mortgages, receivables, etc. It can be done, but it’s a pretty poor way to account for revenues, expenditures, asset acquisitions, gains, losses, etc if you’re dealing with more than somewhere around $50,000 in gross revenues per year and if you have debts on the books.

And you can account for human capital – it’s called goodwill. It’s hard to value though – that’s why accountants stay away from it because no one has come up with an objective means to value human capital. Even intellectual capital is difficult to value; assets such as trade marks, patents, etc. The value of intellectual capital is typically based on a sale; e.g. if you sell a patent to another company or individual, you can set it’s value on the books as the price you paid for it and then amortize it over the remaining life. How do you objectively value human capital? Plenty of people will associate such a concept with putting a value on human life – which irritates most people. The moment you start valuing something subjectively like the value of healthy, well-educated citizens, you’re basically speculating. And how is that any different than speculating in the capital markets, or real estate markets? The value of human capital (such as the mentioned health & education) is indirectly valued in a lot of ways; what’s the GDP of the country, what’s the per-capital GDP of the country, how much does the economy grow year after year, etc. Another possible method is to ask “How much did we spend on education and is there identifiable correlation between those expenditures and our economic growth?” You could do the same with health: “How much did we spend on healthcare and was there an improvement in overall health?” Again though, it’s pretty subjective and without a standard to use there’s not much point in doing it.

To stay on the point of the thread – the federal Finance department’s figures reported for April to June of 08/09 do not show an operating deficit. Do I think we’ll go into an operating deficit? I think there’s a much better than 50% chance. Do I think we could have avoided deficits? Yes.

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I’m not adverse to putting a higher tax on the super rich, but they’ll just move their assets elsewhere and change their residency. Plenty of billionaires have moved their assets & residency from one country to another in order to avoid paying tax.

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Well, let them go-- after they pay the leaving town tax.

This kind of helplessness really sells this country short. There is money to be made in Canada, on our terms. If some don't like those terms, others will.

No one is irreplaceable in this economy, particularly the rich. They in fact are probably the most replaceable element.

And, if we continue on this road of reducing corporate tax to nothing, what will the next demand be?

Prima noctae?

The federal government ran a $1.7-billion deficit in August, leaving it with an overall surplus for April to August of $1.2 billion, the Finance Department said Friday. Looks like you were right. The media chose not to pick up on this.

Screw it, target the one percenters, and return a sembleance of fairness in Canada's taxation system.

It is time for the NDP to aim its guns squarely on the blossoming Canadian deficit.

Federal deficit hits $5 billion in June
Annual deficit on track to hit $50 billion

http://www.cbc.ca/money/story/2009/08/21/federal-deficit.html

What, and upset Canada's one percenters.

So what if the federal government is running a defict? We're in a recession. That's what happens.

Stephen Gordon wrote:

So what if the federal government is running a defict? We're in a recession. That's what happens.

Hi Stephen,

You use these terms like they have some important significance.

Don't you think you had better have a chat with the Governor of the Bank of Canada though who said the resession was over. 

I suppose where the confusion lies is that recession, unemployment, deficit, surplus, employment, growth, etc. in your world seen to have some significance.

In my world these are just buzz words used to manipulate the little guy. They are meaningless.

Since Reagan, and probably before, the little guy has been so badly hosed, and the gap between the rich and the poor has grown to obscene proportions.

Wake me up whenever addressing that issue becomes a prioirty for a Conservative or Liberal government. 

You got it Fidel. For a moment there I thought they might have fooled ya.   :)