Canadian governments drowning in debt

Fuzzy math helps politicians sleep at night.

(This column originally appeared in the Toronto Sun)

By: Candice Malcolm

Managing your household finances can be stressful, but at least the math is pretty straightforward. If you add together all the income you and your spouse earn in a given month, and subtract all the money you spend during that same month, you are left with a number.

If that number is above zero, you can save or invest the leftover funds, or use them for the next month’s budget. If the number is below zero, you’ll have to borrow to cover the costs. And when you rack up credit card debt, you know that you’ll have less money in the future since you will have to pay that money back – plus interest.

Governments, on the other hand, are not run at all like households. Sure, they have incomes and expenses, but that’s where the similarities end.

Governments get all their money from the people. They use taxes, user fees, and marked up prices at government-owned agencies to fund government programs and services. They then use debt to cover the rest of what they spend.

When governments borrow too much, they start to use our tax dollars to pay bankers and bond holders instead of building schools and hospitals.

Last year Canadian taxpayers spent $61.7 billion just to pay the interest on our combined government debt. We spent more on interest to the federal, provincial, and municipal governments than we spent on primary and secondary education in this country.

Most of the time, politicians are shamelessly upfront about their supposed need to borrow. But sometimes even when they tell us they have all the money they need, politicians end up borrowing more money anyway.

Take British Columbia for example, which recently tabled their budget with a $534 million surplus. But, as Professor Jack Mintz of the University of Calgary points out, it is still adding nearly $2 billion to the provincial debt.

Ontario plays the same game. Officially, this is only Ontario’s seventh consecutive budget deficit, and yet, Ontario’s provincial debt has not gone down in more than 12 years.

And Alberta, of all places, is the worse perpetrator of hiding its annual shortfalls. Using a cheeky accounting trick, the government divides its budget into three categories and only presents one of them. While claiming budget surpluses, Alberta has burned through its $17 billion rainy-day Sustainability Fund and managed to rack up over $11 billion in provincial debt.

When governments run surpluses, they borrow. When they post deficits, they borrow even more.

How is this possible?

Well, in the past decade governments conveniently moved from cash accounting – the way you run your household – to accrual accounting – the way corporations measure debt.

If a company buys an asset that will be used, say, over 10 years, then the company will account for a portion of that expense each year for 10 years. There are lots of reasons why companies – who have to worry about matching profits and losses – use accrual accounting.

The justification for the transition away from cash accounting for governments is that they too buy assets that last decades, so it’s only fair that they finance infrastructure without counting it in their operating budget. The problem is that accrual accounting allows current politicians to hide their spending habits from the taxpayers footing the bill, and assume value (often wrongly) for future taxpayers.

That’s only the tip of the iceberg when it comes to government accounting deception.

The most commonly reported debt figures are typically the “net” debt, or debt minus all assets. Governments offset their total debt, but often include physical infrastructure assets that could never be sold.

A 2013 International Monetary Fund (IMF) report showed how the Canadian federal government actually counts current (and temporary) surpluses in public sector pension funds as assets to make the debt look lower. Most of these pension funds are not properly funded in the long run, so counting them as assets is staggering and misleading.

It is fuzzy math like this that helps politicians sleep at night.

They haven’t paid their bills from yesterday, and they haven’t saved enough for tomorrow. So while the current national government debt levels are already dangerously high – as a country we owe well over $1.2 trillion – that is a fraction of our future debt. Unfunded government programs are calculated to be over $2.9 trillion.

When you combine current and future debt, it boils down to $245,000 for each taxpayer.

No wonder politicians fudge the numbers. The real ones would get them thrown out of office.