A $10b deficit isn’t what it used to be

October 19, 2008 · by wciecon · in Canadian economy, Fiscal policy · 7 Comments

There are several reports to the effect that the federal govt may run a deficit on the order of $10b in FY 2009-10. When the deficit went to $10b back in 1977-78, it was 5% of GDP. Thirty years later, $10b is something like 0.6% of GDP.

Let's all not panic, shall we?

7 comments

Nick Rowe · October 19, 2008 - 10:21 pm · Reply→

There’s even less need to panic. The national debt is around $400b I think. With inflation at the Bank’s 2% target, we would need to run an annual deficit of 2% x $400b = $8b just to keep the real debt constant. So a $10b deficit is actually a $2b deficit once we adjust for inflation. And with (say) 2% long run real GDP growth added on top, we would need to run a deficit of 4% x $400b = $16b just to keep the debt/GDP ratio constant. So a $10b deficit would still leave us with a declining long run debt/GDP ratio.
What is the right long-run debt/GDP ratio? I don’t think there’s any good theoretical answer to this question, but there are some signs that the current debt/GDP ratio may be low enough, or even too low. If the (nominal) rate of interest is less than the growth rate of (nominal GDP, governments can borrow to buy stuff, then borrow to pay the interest on the debt, and keep on rolling the debt over, never raising taxes, and yet the debt grows slower than nominal GDP, so it’s sustainable. Ponzi schemes do work in this case. And with long-term bond rates at around 4%, and short term rates less than that, it really does seem as though there’s a revealed preference for the government to run a Ponzi scheme.
Andrew F · October 19, 2008 - 11:22 pm · Reply→

Just as there was no good reason for the wailing and gnashing of teeth about ‘over-taxation’ when the government was running surpluses of the same magnitude relative to GDP?
marmico · October 20, 2008 - 6:36 am · Reply→

As of fiscal year end March 2008, net federal debt is $516 billion or 33.6% of GDP and the interest ratio (public debt charges as a percentage of budgetary revenues) is 14.4%.
In order to successfully run the ponzi scheme, the interest ratio must also remain constant.
Phillip Huggan · October 21, 2008 - 1:37 pm · Reply→

Harper’s retarded GST cuts, politically winning but dumbing down of people (like BCE and Canwest media), encouraged consumption right before a downturn and right before boomers start to die.
It doesn’t make sense to discount inflation. Policy makers sometimes use inflation for good reasons but unless we are contempleting triggering hyperinflation, a society’s taxable assets also suffer the inflation.
Men born in 1947 have an avg life expectancy of 66. They will start to become expensive to care for in 2012 and start to lose employment ability right around now. Women born 1966 (or whenever boom ends) maybe live to around 74?. So would become expensive to care for around 2039 and lose employment ability a few years earlier.
Meanwhile Conservatives have drastic corporate for-the-rich (not for recession employment) tax cuts schedule just as boomers get old and sickly. From 2012 to 2040, you expect corporate taxes to rise or a trend towards deficit spending. Instead Harper has boomers giving it to the young via worst in the world AGW policy and boomer-owned corporate tax cuts. This isn’t Canada anymore, this is richastania. Thx CTV.
Phillip Huggan · October 21, 2008 - 1:47 pm · Reply→

…boomers should be paying down debt and costing GHGs now in their prime, not building Cgy urban sprawl. The gap between the rich and poor here is mirroring the USA with a 20 yr delay. There hasn’t been any low-income housing built (4 of 5 parties planned this) since Trudeau. Racking up debt is inferior to raising corporate or high income taxes. In a recession you raise these taxes and cut low income and small business taxes.
Fernando Margueirat · October 21, 2008 - 11:47 pm · Reply→

” but there are some signs that the current debt/GDP ratio may be low enough, or even too low.”
I’ve heard this argument several times but I still can’t get my head around it. Can anyone explain me in very plain English why a country cannot (or shouldn’t) have $0 debt or even a positive balance?
TIA
Jim Rootham · October 22, 2008 - 1:48 pm · Reply→

“There hasn’t been any low-income housing built (4 of 5 parties planned this) since Trudeau. ”
Not by the Feds, the NDP government in Ontario financed a lot of co-op housing.