Of Debts and Deficits

in Bank of Canada, Debts, deficit, Government

The Deficit leads to the Debt

I have overheard more than 1 conversation over the past little while with folks discussing the Government’s Deficit and how it is the most important thing the Government needs to deal with. While the conversation sounds well based in facts, sometimes these same folks seem to think that once the (budget) deficit is dealt with, the Canadian Government and the rest of the world’s governments will be just fine.

Sometimes I interject and point out that not running a deficit budget is a noble and good thing, however, dealing with the National Debt is a far more important issue to clear up, or have a plan on how to get rid of. Mostly I am poo-poo’ed as a nay-sayer, but on occasion I have had folks say to me, “Aren’t they the same thing?”.

So for those out there let’s just run down these two important Governmental fiduciary issues.

Budget Deficit

This is the same as you and I borrowing money from a line of credit, or worse our credit cards, to pay for our day to day living expenses. The government’s set of expenditures (in the fiscal year) is going to be more than they take in, in income (i.e. taxes, levies, and others) and thus they must borrow money to make the government run.

Typically this borrowing (in Canada) is in the form of short term debt (Treasury Bills) or longer term debt (Canada Savings Bonds), and this debt is typically bought and has a rating associated with it, to show that the Government is a good credit risk (this is where the Greek and EU issues arise, no one seems to trust these folks to pay back these debt vehicles).

Much of Canada’s debt vehicles are actually held by Canadian Citizen’s (although I am not sure of the exact numbers, anyone cares to chime in go ahead). In the U.S. the national debt is mostly held by foreign institutions (rumor has it the Chinese and Japanese mostly), which is more worrisome (as with all debt vehicles, the lenders can call these loans whenever they wish).

National Debt

This is a direct connection to, but not the same as the budget deficit. For each year that the Government runs a deficit budget the National Debt increases by that size (I believe the debt started in the 1970’s) for each year. This debt is effectively the principle on the long term debt put out by the government to finance the deficit budgets.

This debt is a lot like your Mortgage in terms of size (however if the Government ever pays it off, they don’t really have a tangible asset like your house at the end of it), but now Canada is effectively very house poor, due to the size of the National Debt.

How big is the national debt? Well if you are to believe the Canadian Tax Payers Federation, pretty darn big.

If you refresh you’ll see it increase. When I looked it was $523 Billion dollars, that is chump change compared to the USA, but still a big chunk of money. Allegedly my portion of it is $15,412.68, I’ll send the government an IOU for that.

Debt Service Charges

As with all debt, the first thing that the Government must do every year is service their debt, so thanks to this National Debt Canada must pay every year (much like you do with your Mortgage) at least the interest owed on the debt, so that is money spent for things we already had and did.

This issue is the crux of why paying off a large debt is important, any moneys you are spending on the Interest to service the debt vehicles you use is lost money, if you pay the debt off you can use that money for real tangible things, or even save it.

Hopefully this overly simplistic view of the Budget Deficit and National Debt will cause you to think, if you feel I am missing some major point, please feel free to comment.

{ 7 comments }

  • Ogada Jarateng August 1, 2010, 4:59 PM

    There is no reason for governments to have deficits or surpluses. We, the people should have an input in the collective national, regional or local government budgets. we have to place a cap on these budgets. We can have annual referrendums on budgets, yes, we vote on what goes in the budget. No silly pet projects, no foreign aid, no military war games. Just the necessities first. Keep the budget balanced, no large tax increases unless the people support it. Get rid of Central banks and their interest charges on the money they print for the People (government) delink from IMF-WB-WTO. that’ll will do it. Start thinking outside the box for a change.

    Reply
  • 2 Cents @ Balance Junkie May 12, 2010, 12:47 PM

    What will you call your Big Cajun country and when can I take the citizenship oath? I think debt is just wrong too, especially when it always seems to be increasing and never shrinks!

    Reply
    • bigcajunman May 12, 2010, 1:12 PM

      It could be like “Rosie-Land” in one of my favorite M*A*S*H episodes, I’d even be Maxine!

      Reply
  • Michael James May 12, 2010, 10:41 AM

    I think of the deficit as the first time derivative of the debt, but that isn’t too helpful to most people.

    Reply
    • bigcajunman May 12, 2010, 11:06 AM

      You are one of those folk that Bill Connally spoke about with his diatribe about “What is the result of One A Plus One B?”.

      Reply
  • Neil May 12, 2010, 9:13 AM

    Eliminating the deficit naturally eliminates debt as well. It just takes many deficit-free years to meaningfully pay off debt.

    I would argue that neither are disastrous things to worry about at this point in the game. Governments should certainly run operating surpluses (or at least average a break-even over several years, allowing for Keynesian stimulus during downturns), but many government activities are capital investments in infrastructure that help to grow the economy, which by extension increases government revenue and pays for itself.

    Sometimes (and now is probably such a time) the interest rates paid by government are so low that it’s in their interests to roll over debt for longer, whenever inflation outstrips servicing costs.

    Reply
    • bigcajunman May 12, 2010, 9:45 AM

      Good points, paying back will take a while not matter how low interest rates are (given most surpluses are only in the $10B range on the best of years), so that might take over 50 years of consecutive surpluses to pay it off?

      Being in debt just seems wrong, if I start my own country I think I’ll put that in the constitution.

      Reply

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