• Government Debt and Deficit 101

    What is the difference between debt and deficit? Many people confuse the two terms and think they mean the same. They are not. It is easiest to look at the difference by looking at what the government does to its budget.

    The Budget: A Plan on How to Spend the Money

    The government just like families and individuals have a budget (Well, I hope you have a budget.) The budget is essentially a plan on how money should be spent. But before anyone can make a budget, there should be money to spend with in the first place. In the case of individuals, the money comes in the form of salaries, commissions, profits and other sources of income. For governments, revenues come in the form of taxes, customs duties and other forms of income. From the projected revenues, government will then prepare a budget and allocate funds for government expenditures such as salaries of government employees and public officials, defence, public education, social welfare, infrastructure and other items. As much as possible, the government should have more revenues than expenditures.

    But, more often than not, it is the other way around: Government spends more than the revenues it has collected. In such a case, the government is said to have incurred a deficit. Now, where will the government get the extra money to pay for its expenses? Well, just like individuals and families, the government will borrow money.

    So, the following fiscal year, the government must pay off the deficit so that it can come out clean. If the deficit isn’t fully paid, whatever remains becomes part of public debt. And just like debt of
    individuals, the amount are compounded by the principal’s interest . The public debt also grows with successive years of deficit spending. If you take a look at 50 years of Canadian federal fiscal policy beginning fiscal Year 1963 with PM Lester Pearson to PM Stephen Harper in the present, you will see that there are more years in which the federal government posted a budget deficit than it did a surplus. After more than 50 years, the federal government a staggering public dent. In a “Debt Clock” regularly posted by Dave Manuel, the latest estimated public debt of Canada is a staggering CDN $642 billion!
    If every Canadian were to pay that debt now, the dent payment per capita would be around CDN $18,600 per capita. That means every Canadian man, woman and child has to pay that amount if Canada wants to be debt-free immediately. Quite a tall order, huh?

    Paying the Debt Method 1: Raise Taxes
    The main way governments pay off its debt is by raising revenues through taxes. Hence, theoretically a government can ask taxpayers to cough out money amounting to around CDN $ per capita by means of taxes. It can create all sorts of taxes so that the amount of CDN $ 18,600 per person will be raised.

    Of course such a move would entail the approval by the House of Commons. And no government -- whether Liberal, Conservative or whatever other party – would think of raising taxes that high because it will be political suicide to do so. You can just hear the howl of all taxpayers if they even hear such a proposal.

    Paying the Debt Method 2: Make Drastic Budget Cuts
    Another way by which the dent can be paid is for the government to make drastic cuts in the budget. That means the government may have to reduce expenditures for cherished government programs such as public education, health care, welfare. It may also have to lay off many government workers. Ouch! Again that’s not a politically viable idea.

    Paying the Debt Method 3: Print Money<.b>
    The government can print money. That is only a last resort because that move can increase the money supply ad cause hyper-inflation. The Bank of Canada would not even contemplate doing that. In fact, no right thinking central bank would even consider printing money. Doing so would create more problems than it would solve.

    Paying the Debt Method 4: Renegotiate Terms with the Creditors
    Finally just like individuals, the government can negotiate with its creditors to extend the terms of its debt payments. Generally creditors will allow debt renegotiation – but with a price of course. Creditors may ask the federal government to impose new taxes.

    Caught in a Bind
    The task has actually fallen on the Harper government to fix the debt problem. It is not in an enviable position. It is faced with several unpalatable choices . But it has to make some hard choices.

    The choices for PM Harper (or for any other PM if they were in his position) could have been easier if past governments have tried to be fiscally more prudent. If previous governments had tried to rein their spending, then the public debt would not have grown into the monster that it is today. It is the same way with individuals or families. It begins with reining in spending from the very beginning. Then the family would not have to face very tough choices in the future,


    1. Canadian Debt Clock (updated Oct 10, 2013)

    2. Canada's deficits and surpluses, 1963-2012

    Article Created: 2013-11-18

    Article Updated: 2013-11-20

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