WE WON’T MISS A FEW PIECES OF SILVERWARE
Governments in Canada struggle with falling revenues and rising deficits
Politicians are fond of talking about public finance in corn-pone terms, a mix of homely analogies and folk wisdom, the better to make themselves understood, or misunderstood, by the bumpkins they imagine voted for them.
A finance minister, for example, might denounce “borrowing to pay for the groceries,” meaning a deficit on operating expenses, as distinct from borrowing for capital projects, which is to be taken as the soul of wisdom by comparison. This allows him to run the deficits in practice that he abhors in principle.
When governments privatize Crown corporations or other assets, opponents will commonly claim they are “selling the family silver,” which is understood to be very bad policy indeed, even when needed to buy groceries. Jack Layton used to rail against the policy, then in place, of running surpluses to pay down the national debt, likening it to a homeowner obsessed with paying off the mortgage even as the house is in such need of repairs it is falling down around him.
Much of this sort of rhetoric is flying about these days, as governments, especially provincial governments, struggle with falling revenues and rising deficits. So, in that spirit, let’s have a discussion of that perennial personal finance column standby, “pay down the mortgage or max out your RRSP?” Only with governments.
Does it make sense, first, for governments to go into debt, if it’s not for “the groceries” but for, I don’t know, a Camaro?
That was the message earlier this spring from the Christy Clark government in British Columbia, which claimed to have balanced its budget for the third year running even as it was adding billions to the provincial debt. Indeed, the government pledged to run operating surpluses over the next three years — paying down “the debt that pays for groceries” — during which time the actual debt is projected to climb another $10 billion.
The argument is that capital projects pay returns not just to present taxpayers, but future ones as well. Better to borrow the money now, then, and pay it back over time, rather than bear all of the cost upfront. Which is fine, as far as it goes. But there are simpler ways of spreading the costs of a fixed asset over time: That’s what amortization is for.
Separating operating and capital costs into different budgets, moreover, risks giving voters a distorted picture of their finances. Ultimately, more of one thing means less of another. The money that is set aside for capital projects is money that is unavailable to pay for “the groceries,” and while that might be good budgeting, the family members should at least know that’s what they’re doing.
Meanwhile, the government of Ontario (Kathleen Wynne, prop.) is reported to be planning major asset sales: Not only is its stake in General Motors said to be on the auction block, but it even intends to sell a stake in Hydro One, the provincially owned electricity transmission utility — perhaps even the whole thing. The sales could raise billions for the provincial treasury.
Again, nothing wrong with this, as far as it goes. Critics sometimes complain that governments are giving up the profits these companies return to the treasury. But a privatized company pays taxes, where a Crown corporation does not, which would seem a morethan-adequate substitute.
We should be clear, though: The sale of government assets is not, as it is sometimes described, a way of “reducing the deficit.” It is a way of financing it, the same as if you’d borrowed the money. It’s just that instead of selling bonds, you’ve sold shares. The only part of the proceeds that can legitimately be set against current spending is the capital gain — the difference between the asset’s sale price and the value the government assigns it on its books. And whereas a government can always issue new bonds (well, within the limits of people’s willingness to buy them), you can’t sell the same hydro tower twice.
What are we to make, finally, of the government of Alberta? The premier, Jim Prentice, is warning Albertans of the bitter fiscal medicine to come: spending cuts, certainly; tax increases, maybe. The alternative, he says, would be to sell off the assets in the Alberta Heritage Savings Trust Fund, and we can’t have that. Can’t we? Personally, I find the notion of selling government assets to finance deficits a lot less troubling than the idea Albertans were previously being urged to consider, that of plowing surplus oil revenues (when there were surpluses) into building up the fund.
Certainly it’s wise not to fritter away a finite, non-renewable asset like oil on current expenses (the groceries, again), but rather to convert it into other assets, capable of paying returns in future. But nothing says those assets have to be held in public hands. Should the province find itself in surplus sometime in the future, the excess revenues could just as well be channelled into individual RRSPs.
But the idea that the government should plunge into debt over the next several years, with all of the associated risks — interest rates have got to go up sometime — even as it is holding onto billions of dollars in marketable assets, seems obtuse. To be sure, in the long run there’s no substitute for cutting annual spending back to the level annual revenues can support. But if it helps to tide things over in the short run, well, would anyone miss a few pieces of silverware?
Jack Layton used to rail against the policy ... of running surpluses to pay down the national debt, likening it to a homeowner obsessed with paying off the mortgage even as the house ... is falling down around him.’ Andrew Coyne. The sale of government assets is not, as it is sometimes described, a way of ‘reducing the deficit.’