Canada Deep in Debt for over 50 years

  Background



Recently the Department of Finance Canada published the latest fiscal tables that detail our federal governments' financial history over the past 49 years. After some searching around, I found an older copy that includes another 15 years earlier. I took the 1960-61 year from the earlier table and combined it with the latest 49 years to provide the 50 year snapshot of Canada's financial health. Besides being a nice round number (half-century), I was born within 6 hours of the start of Canada's 1960-61 fiscal year and I can identify very closely with this time frame.



This 50 year snapshot begins halfway through the term of John Diefenbaker and concludes in the middle of Stephen Harper's term. I generally stick to the 50 year term for comparisons, but will make some additional observations outside that term. In general, John Diefenbaker carried larger budget deficits in his earlier years in office ($557 million higher annually), and we are only through 7 months of 2010-11 for Stephen Harper but the "on-track" statements suggest that the 2010 budget which forecast a $49 billion deficit this year will happen (i.e. the trend is going in the wrong direction).

The Bottom Line

I will start with the bottom line, because this is really what matters to Canadians. We have been carrying a large debt load since at least World War II. If we did not have this starting debt load, today we would have been able to afford an average of 19% higher program spending with zero debt today. The big problem with the finances of our country is debt management.

The Raw Data

Let's first look at the annual operating surplus (deficit) and the national debt. Note: click on any of the charts to enlarge them.

In the above chart I use the operating surplus (deficit), not budget surplus. The budget surplus (deficit) however is reflected in the (mounting) debt. The operating surplus illustrates how well the government balanced the program costs with revenue in a specific year. The government is still responsible for past debt, making the budget surplus (deficit) most important. The green lines at the bottom of the chart represent changes in Prime Minister, and the coloured background represent either Progressive Conservative/Conservative (blue), or Liberal (red) governments. It is clear that the years 1975-1995 were very bad for our debt, and the year 2009 and looking forward is also very bad.



I delineate with the start and end date of each Prime Minister's government. It could be argued that policies of one Prime Minister will affect the early part of the next one(s). This is especially true for those who served very short terms (Turner ~3 months, Campbell ~4 months, and Clark ~9 months); unfortunately there is no clean way around this. By being consistent I hope to at least provide a balanced view. Just as poor [financial] decisions during the latter part of Trudeau's time in office affected Turner & Mulroney, the poor decisions during latter part of Mulroney's time in office affected Campbell & Chrétien, and the good decisions during Chrétien & Martin's time in office affected Harper. If you look at the details on the charts you will clearly see the trends that start in one term and continue into the next.

The Basic Scorecard

In a few calculations, I provide the absolute numbers for a term (e.g. total debt accumulated by each Prime Minister). In most case however I will provide annualized results. This allows comparisons between Prime Ministers even though their relative terms may vary in length. Let's first look at what I call the budget scorecard. This has both the operating surplus (deficit) and budget surplus (deficit), in annualized form. The operating surplus shows us that Trudeau, Clark, and Turner were not able to cover program costs from revenues (taxes) on average over their term in office, although they may have had some years with an operating surplus. Harper was able to manage an average operating surplus over the first four years of his term, unfortunately the trend is downward and last year was twice the worst operating deficit in history. 2010-11 looks like it will be similar. If this keeps up, Harper will be looking at an overall operating deficit. The budget surplus is most important as it includes the debt servicing charges. Regardless how a Prime Minister deals with current expenses, prior debt servicing is part of his/her responsibility. The situation here is much different, and we can see that over the past 50 years it was only during Martin's term that a Prime Minister has managed an annualized budget surplus.

How much did they borrow?

Not all our Prime Minister's borrowed money to cover their program operating costs, but many did. Those that did are in the following table, sorted from worst to best on an annualized basis. I did not include the three who didn't borrow any money to cover their operating costs: Campbell, Chrétien, and Martin.

Prime Minister	Total new money borrowed for programs	Annualized new money borrowed for programs
Turner	$2,658 million	$12,288 million
Harper	$26,184 million	$6,317 million
Clark	$2,591 million	$3,466 million
Trudeau	$48,223 million	$3,122 million
Mulroney	$13,450 million	$1,534 million
Diefenbaker	$174 million	$57 million
Pearson	$193 million	$39 million

Scaling to reflect inflation

It is argued that in our inflationary economy, a better comparison is debt/GDP levels. With a larger economy, it is suggested that it becomes easier (I'm still waiting) to pay down previous debt. The analogy is like buying a house, and then switching to an accelerated payment plan after getting a raise. Let's first compare the national debt with Canada's GDP.




I find the accelerated GDP growth rate in the new millennium a bit disconcerting, but that is a topic for a different discussion. To simplify viewing, I have combined both into a single metric (debt:GDP ratio). The following chart shows that ratio in the blue line (left axis), and the growth of the debt:GDP ratio is reflected in the bars (right axis). A red bar is bad, as we are growing the debt relative to GDP. A green bar is good, as we are shrinking the debt relative to GDP.

It is clear from the above that things were going well during the Pearson years, and the first half of Trudeau's first term. Things then turned bad throughout the rest of Trudeau's time, including Clark's and the first year or so of Mulroney. Mulroney then made some changes that reversed that trend for a couple of years, but unfortunately that was short lived and the latter part of his term, Campbell's and the first year of Chrétien saw us slide back down. The situation was fixed by Chrétien and we saw improvement through his term, Martin's, and into the start of Harper's. The past couple of years however we have again slid back into increasing debt relative to GDP. I did not get GDP data back far enough to evaluate Diefenbaker in this respect, part of a future project. It does not look promising however, as he had even larger deficits earlier in his term.

The Redrawn Scorecard to accommodate inflation

It is now possible to return to the earlier scorecard, but scale it relative to GDP. This is probably the best overall comparison of the ability of the different Prime Minister's governments to manage our debt.

We can dismiss the 3 & 4 month terms of Turner and Campbell as they had little time to make effective changes. This leaves us with a poor record in debt management for Trudeau's second term, and Mulroney a close second. Note that if both of Trudeau's terms are combined (right of chart), then Mulroney is about twice as bad as Trudeau's overall debt management performance. The best overall is Martin, followed by Chrétien and then Pearson. Everyone else is bad, it is just a matter of degree.

Budget surplus as a percentage of revenue

Looking at debt:GDP ratio we are depending on inflationary forces to make our problem less severe, but in the long run we need to reduce the debt. The only way to reduce debt is to have a budget surplus. We pay down the debt from our revenues, so we should look at the budget surplus as a percentage of revenue. We need to run many years in the green (above zero) in order to pay debt down.

The Big Picture

Over the past 50 years we have spent $4.16 trillion on programs, and have collected a total of $4.74 trillion (taxes and other revenue). In that same time-frame our national debt has increased by $506 billion. We have gifted $1.1 trillion to the bankers during my lifetime, or $32,563 for every man, woman, and child alive on March 31, 2010. Better debt management would have allowed us to have both zero debt today, and spend 19% more on average for programs.

Why did this happen?

There never seems to be enough money to go around, but it is abundantly clear the main reason is our poor management of the debt. Regardless if your view is that governments should have lower taxes and less services, or higher taxes and more services, either situation could be accommodated if we had the flexibility of a lower debt. First and foremost our governments need to deliver balanced budgets. Second we need to clear this debt off our books rapidly. The only way to accomplish that is to direct sufficient funds toward that goal. Chrétien, Martin, and Pearson get full marks here and the rest of the our Prime Minister's governments are failures. We can neither raise program expenses without a corresponding rise in taxation, or cut taxation without a corresponding drop in programs. The actions of Prime Minister Stephen Harper took in making drastic cuts to corporate and consumption taxes turned us again on the road to financial ruin, just as clearly as new programs initiated by previous governments did.

Until we get our heads above water, we will continue to drown in debt. It is imperative we maintain adequate taxation to not just cover program expenses but with enough headroom to accommodate debt repayment as well. There is no magic formula for appropriate level of taxation and money to allocate to programs, it all depends on what priorities we want as a country. With a 50 year history however we do have a good template from which to make comparisons. The following chart has program expenses and revenue scaled to GDP.

In an ideal world with balanced budgets, both lines would be equal and maintained at a constant level to maintain a standard level of service. We can see that program expenses have been dropping steadily since the early 1980's, with the exception of last year's stimulus spending. Until the debt is repaid we also need to maintain the revenue sufficiently above program expenses to cover interest and principal repayment. Based on historical averages it look like having revenue around 23% of GDP, and program expenses around 17% of GDP (about 5% of GDP delta) will allow us to repay the debt. It will still take many years to complete that repayment, but once we do we can then afford whatever combination of lower taxation and/or increased programs we want.

What if we didn't start with any debt?

I thought it would be interesting to look at the scenario if there was no debt owing when I was born. Is this a problem caused by my generation, or one we inherited from a previous generation. It is clear to me that my generation has not done enough to solve the problem, but did we start it? With the data available, it was easy to generate a simulation based on a starting debt in 1960 of zero dollars (actually I can simulate any starting value), and maintain the same program expenses and taxation for the past 50 years. As I expected, the debt was repaid. So the other question in my mind is if we ran a surplus and invested that surplus what would we end up with. I have charted below 5 scenarios. The status quo is charted in brown and shows our current debt, the other four lines represent 0% interest on any surplus invested, a fixed rate of 1.5% interest, a variable interest rate equal to 33% of what we paid to the banks on their interest charges, and finally the unlikely full bank-rate interest. It would be easy to plot other scenarios with different rates, or perhaps a point spread.

What is clear however is that our current debt is inherited from previous generations. All simulated scenarios show a surplus today, even if we didn't earn any money on investing our surplus funds. They all run a debt during the 1980's and 1990's but we managed to get ahead by 1999. I also ran this model with different starting debts, and found that anything below $8.5 billion debt in 1960 would allow us to be debt free today.

Making it Personal

When I was born, I owed the banks $722 on behalf of the federal government. By my 50^th birthday, that had increased to $15,385. Over my lifetime, I gave $162,799 to the federal government of which $18,472 went straight to the banks. I know, you are thinking you paid more taxes than that. Well just remember, I am your average Canadian that includes man, woman, and child.

Comparison by Party

During the past 50 years we have had either Progressive Conservative, Conservative, or Liberal party run governments. In all the charts I have shown this with the coloured background. I will now provide a table to sum up the differences between these governments. I have grouped Progressive Conservative and Conservative together for this comparison.

Party	Progressive Conservative / Conservative	Liberal
Time in office	17 years (33%)	33 years (66%)
New money borrowed	$40 billion	$54 billion
Average new money borrowed annually	$2.3 billion	$1.6 billion
Total operating surplus	$128.30 billion (22%)	$452.30 billion (78%)
Average annual operating surplus	$7.5 billion	$13.7 billion
Total budget deficit	$345.0 billion (67%)	$173.1 billion(33%)
Average annual budget deficit	$20.2 billion	$5.3 billion

It appears that Progressive Conservative or Conservative parties run budget deficits that are four times higher than Liberals, and operating surpluses that are half that of the Liberals.

Without our original debt load that dates back to World War II, we would be debt free today and have 19% room to either focus on more programs or lower taxes. We need to focus on clearing up this debt so future generations will not inherit our parents problems.