Government deceit at budget time

News reports have highlighted the projected deficits and debt of the three levels of government which Canadians taxpayers service. Since October 2015, the projected federal budget deficit has risen from zero to a possible $30 bn depending on the Liberal government’s spending plans in 2016. The Ontario government has announced a budget deficit of 7.5 bn, and most Canadians are subject to decisions regarding municipal expenditures. The City of Ottawa for example had a budget shortfall in 2015 of over $10 bn.

While Canadians are typically subject to three levels of government, each of which puts a bold and optimistic spin on their finances, each taxpayer is responsible for funding all three levels. Here are some things to note in the presentations politicians make.

 

  • At each level, politicians will often state (promise) that a deficit will be eliminated at some chosen date. This is a canard. They have no way of knowing whether revenues will rise in the future or that expenditures will be reduced.
  • While deficits are the difference between income and expenditures in a given year, debt rises or falls depending on yearly income and expenditures. Financing annual debt levels depends in part on the level of interest rates. At present they are low. Assumptions about future rates are just that. If rates rise, annual interest costs rise and the ability to eliminate a future deficit weakened. Politicians will make assumptions which suit their interests by putting an optimistic spin on the future…..we probably would do the same if we were in their shoes.
  • Canadian taxpayers are subject to a jungle of policy conditions which determine the amount they pay in federal and provincial income taxes. The number of entitlements with lower taxes for targeted groups has grown over the years. When filing annual returns, taxpayers will be faced with providing ever increasing details of their annual receipts and expenditures to determine their entitlements. How an individual is better or worse off because of a new policy is often difficult to assess. But here are some tax increases for Ontarians which apply to some familiar items.
  • There is a new monthly charge for using natural gas in addition to the charge for the amount used. The tax per liter of gasoline is increasing as are the taxes on drinking and smoking. Home owners who switched from oil and electricity to gas for heating may wish they had not changed, and may now want to switch back to oil. The moral is that governments will follow you with tax increases wherever you choose to spend, if it looks like they can collect more revenue.
  • Another implicit tax increase occurs when governments don’t spend on things which can cost you money. I speak as a resident of Ottawa. The deplorable state of the city roads in part due to the climate, but in part to the failure to ensure that construction and paving is done to build reliable road surfaces, increases the cost of operating a car or truck. These have to be repaired more frequently and impose a cost (de facto tax) on car owners.
  • In order to make higher education more affordable to low income students in Ontario, the government has abolished their university fees. A worthwhile objective achieved in a way similar to a tax reduction for some students. But what might be other consequences, and is there a better way to achieve this objective? Consider what may happen. Universities will lose revenue when admitting low income students. They may react in a number of ways. Accept fewer low income students; reduce their costs of operation by hiring fewer faculty, or less qualified faculty; hire cheaper part-time as opposed to full time faculty; increase class size. Under the existing Ontario tax regime, all these effects have occurred. The new policy merely increases their likelihood.

 

While an individual has a finite lifespan, a government does not. The latter can run deficits and increase its level of debt if people are willing to finance the deficit through taxation or by purchasing government bonds. When interest rates are low, as they are at present, but may not be in the future, governments have the incentive to finance their expenditures through increased taxation and increased debt by issuing bonds. Lenders are not happy with low interest rates but are willing to lend if there are few attractive options. Government debt is considered to be a safe investment. But is it, and at what point does it become a problem for bond holders and tax payers?

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