In 2018, Governments Build Debt, We Buy Fancy Boats

AppleMark

You might have heard me through the years talk about how interest rates are the lubrication of the agricultural economy. When interest rates are low it’s like a hot summer’s day making the motor oil viscous. However, sometimes in January when I add a litre to my tractor I actually have to squeeze the bottle get the oil out. Back in the 1980s when interest rates were high it was just like that cold oil. Getting things done was just that much harder.

So credit makes the world go round especially in our agricultural economy where some times things are done on a handshake. Of course, since interest rates have got so low, credit has become a lot easier. In fact, many of our finance ministers have cautioned Canadians about spending more money. With money being cheap, a lot of Canadians like to let the good times roll.

Of course I spent most of my life getting out of debt. I thought that was the goal after the bankers shaking their finger at me in the 1980s. So when I walked into my local bank a year ago and the teller swiped my card and told me I was eligible for a $20,000 line of credit, I was dumbfounded. She wondered if I wanted to take it. My 1980s bankers office was just over across the way. He was surely turning over in his grave.

I retorted back to the teller that I should go buy a fancy boat! She laughed and said yes a real fancy boat. Needless to say, I passed on her offer.

Then we have government debt. Our Canadian government has a total debt of about $640 billion. Our Ontario government has a total debt of about $312 billion. Your municipality certainly has debt as well. However, on budget day when governments announce their deficit spending and the related debt, some people go crazy with consternation. You hear cries of why don’t we have a balanced budget? You hear cries about government debt. Meanwhile, Canadians are racking up debt at record levels and not pointing the finger at each other.

It is a interesting paradox and one that I don’t believe in. For instance, I often get the comment from some farmers that if they ran their farm like the government does their finances, they would be broke. That certainly is true but the comparison is not just. Governments in Canada have the responsibility for running a country, which includes a military, health care system, transportation facilities and infrastructure that takes money. It is of a huge benefit to the Canadian economy. Ditto for the Ontario government and our municipal government. Governments simply need money to do what they do. They are the trustee of the public good and if that takes debt, so be it.

Governments have always rationalized their propensity for taking on more debt by making the debt to GDP ratio the litmus test. Last week when the Canadian federal budget was announced, there was a budget deficit of 18.1 billion dollars. In other words, the government was spending $18.1 billion more than they were bringing in thru taxes and other revenues. However, the debt to GDP ratio was approximately 31.6%, which was considered reasonable especially when that same ratio was up in the 60% range back in the 1990s. As long as the economy is growing, revenues will continue to service that debt and in fact grow beyond it. That is the theory and generally speaking in the Western world it works pretty well.

Problems arise when there is a recession and negative economic growth. Then all of the economic revenue projections are often deficits, which grow and so does the debt. Governments generally get in trouble during this time because people grow angry that government services are curtailed. It’s somewhat of a vicious cycle politically.

It is also somewhat of a self fulfilling prophecy. Politicians are always motivated to do the popular thing versus the right thing. Governments do not tend to spend less money, but always tend to spend more money because that’s what makes them more popular. Governments have a tremendous propensity to spend money. The bill for that spending gets punted down the road. Of course they have all kinds of power to gather taxes.

Canadian farmers on the other hand have to pay the bills and that’s why we cannot get overextended into debt in case someday interest rates go up sharply. Needless to say credit remains the lubrication of the agricultural economy, without it nothing would get done. Of course, you don’t want to be a day late paying your taxes to Revenue Canada. The penalties are heavy.

So if the government wants to buy a boat, they can. In fact, there are a lot of military naval assets that need paying for. The criticism governments get over debt is probably well-placed, but keep in mind it’s a totally different animal than borrowing to buy that big tractor. When you roll that big tractor across the next bridge or drainage ditch, remember that. Government debt does have purpose and can be a very good thing. Kicking that can down the road does have benefits.

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