Prudence is a virtue

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Appeared in the Calgary Herald

Back when my paternal grandparents were alive, they lived with thrift as their constant companion and spent little more than necessary, splurging only on others.

Every spring, my grandmother would can a plethora of fruits and vegetables from her Okanagan garden. In anticipation, she saved every plastic bag for use in canning. As a kid, I thought it odd behaviour. But of course, I had no knowledge then of the shortages she, her siblings and parents endured in the Soviet Union in the 1920s before they emigrated to Canada.

More generally, beyond their initial mortgage, I don’t think my grandparents ever bought anything on credit. They would have been surprised by the recent tendency to borrow money against one’s home equity to finance renovations or vacations. They and much of their generation aimed to pay their mortgage off as soon as possible and to stay out of unnecessary debt.

I note the personal memories because the news that federal Finance Minister Jim Flaherty has again modified the government guarantees as applied to mortgage insurance is a response to how consumers have taken on ever-more debt.

To wit, the Bank of Canada noted recently that while consumer and mortgage debt have both risen over the past 30 years, the increase in the debt-to-income ratio before the mid-1990s was mostly driven by higher residential mortgages. However, the Bank writes that since then, consumer credit has also been a contributing factor.

In other words, people once took on more obligations because of their home; more recently, extra debt results from not wanting to defer gratification. More people apparently now also borrow for consumption (think automobiles and vacations).

It might be argued that such borrowing is a response to low interest rates. It surely is. But that’s not necessarily the same as a rational or prudent response to a tempting opportunity. The existence of a lunch buffet does not mean it is wise to eat everything that is available.

Still, if individual Canadians have binged on debt, they’re only doing what governments have done for decades.

Since 1947 (as far back as comparable department of Finance data goes), the federal government has run a red ink budget in 45 of the past 65 years—two out of every three postwar years on average. In the provinces, a comparison is unavailable before the mid-1980s, but in the past 26 years, they have (collectively) run a deficit in 19 of those years, or in about four out of every five years.

Most of the red ink can’t be blamed on economic downturns. Since the Second World War, Canada has experienced eight recessions. Most lasted less than a year. Nor can the tide of recurring red ink be blamed on a lack of tax revenue. Federally for example, red ink budgets were the norm even when taxes were historically high as a percentage of the economy in the 1970s and 1980s.

Some debt, personal or public, is defensible. In most (but not all) years and depending where you live, mortgage debt is a reasonable and preferred alternative to renting for one’s entire life.

On the public side, wars and recessions will mean the public treasury is hit with a decrease in revenues just as expenses (think unemployment insurance) rise. That can’t be reversed overnight. But nor should it take five, seven or 10 years to get to a balanced budget, as is now the pace set by many Canadian governments since the 2009 recession.

There’s an inevitable consequence to chronic government deficits: ever-higher interest costs on the debt that siphon tax dollars away from other uses, including for families who of course have to pay the tax bill.

As well, chronic red ink borrows from future generations who will need a robust economy and who will also inevitably spend some of their money on taxes for government services. To that end, spending and tax levels must be moderate. Without that, in worst-case scenarios, debt crowds out everything else and you get Greece. There, the Greeks government is even delaying paying pharmacists because it’s broke.

A less dramatic scenario has long been in play in Canada. Collectively, the provinces spend $22.5 billion on interest to service provincial debts. That’s almost as much as what Saskatchewan and Manitoba together spent on government programs in 2011.

The federal government spends $31-billion annually on debt interest, or about one-quarter of what Ottawa collects in personal income taxes.

Think about what you could have done with one-quarter of the federal income tax you paid last year that instead went to pay interest on the federal debt.

There are better uses for money than interest payments. It’s as true of government finances as it is with household budgets.

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