Canada no longer fiscal bad guy

Commentary, Role of Government, Frontier Centre

Through most of the 1990s, Canadians got used to the idea of being one of the fiscal bad guys of the Group of Seven industrialized countries. If it weren’t for Italy, analysts would mutter, we’d be the worst of the lot in the measures of deficits and debt.

Well, surprise. Canada has already leaped from second-biggest government debtor in the group to second smallest, if the Organization for Economic Co-operation and Development has it right.

What’s more, we seem to have done the jump in only four years. While we’ve been steadily whittling down our debt with steady annual surpluses, the debts of four other countries — Japan, Germany, France and the United States — have been rising.

Now only Britain lies between us and the ribbon for best-in-show.

Italy still gets the booby prize for biggest debt, but Japan, which had almost no debt a decade ago, is closing in fast.

At first glance, the OECD figures, which were published last month in the Paris-based organization’s semi-annual economic outlook, look a bit wonky. The debt of all Canada’s governments — federal, provincial and local minus the assets of the Canada Pension Plan — come in at a mere 41.1 per cent of gross domestic product.

Yet Ottawa tells us that its debt only recently slipped below 50 per cent of GDP, and the provincial governments collectively had debts piled on top of that.

There’s a reason for the different counts. The federal government owes about $127-billion, equal to 12 per cent of GDP, to its civil servants for their retirement pensions and properly counts that liability as part of its debt. For a while, that extra debt made it into the OECD tables.

The problem is that the Europeans don’t make a similar provision, especially the 12 countries in the Euro Zone, notably Germany, France and Italy. If they did, they’d be in breach of the Maastricht rules for European Union members that have adopted the euro. Ottawa protested, so the OECD rejigged the data to make them more comparable.

They still aren’t perfect, but they’re close. More important, most economic analysts around the world use these numbers because the OECD is a convenient place to reel in data for international comparisons — one-stop shopping for a wide variety of indicators.

What the new numbers show is that Canada’s net government debt peaked at 68 per cent of GDP in 1995, which put it about 20 percentage points higher than the average for all OECD countries and almost nine points higher than the United States.

Since then, Canada’s debt has fallen steadily, the result of regular government surpluses. Aside from Japan, where an on-again, off-again recession has produced deficits and rising debt, most other countries followed the same path, though less vigorously than Canada.

By 2001, the latest year for which the data are relatively solid, Japan’s 58- per-cent debt ratio had moved it into second place behind Italy’s 98 per cent, while Canada, Germany and the United States were all clustered at about 44 per cent.

France and Britain (at 38 per cent and 29 per cent, respectively) were at the bottom.

According to the OECD’s estimate for 2002 and its projections for 2003 and 2004, Canada’s debt will keep falling, while that of the United States, Germany and France will keep rising. While Canada keeps running government surpluses, the other three will run big deficits that will swell their debt.

By 2004, our debt will be down to 36 per cent of GDP, a full 10 percentage points below the United States’s 46 per cent.

Those projections were made before Washington rolled out its latest tax cut proposals, which have prompted many analysts to increase their forecasts of U.S. deficits.

Canadians can now make an unusual boast: We’re the only G7 country with twin surpluses, one in the government accounts and one in the current account, which tracks our financial dealings with the rest of the world.

We’ve been in that position since 1999, and if the OECD is right, we’ll stay there until 2004. Since 1985, only two other countries have pulled off this feat — Germany in 1989 and Japan for six consecutive years during its powerhouse days from 1987 through 1992 before it stumbled so badly.

The United States is running twin deficits, as it has for most of the past two decades. One consequence is that Canada’s net debt to the rest of the world — under 19 per cent of GDP at last count in 2001 — is now below that of the United States. That’s a huge change from the mid-1990s, when Canada’s foreign debt was 43 per cent of GDP, while that of the United States was only 5 per cent.

Canada’s days as a big debtor are over.

Has anyone in the foreign exchange market — where the loonie still trades for less than it did in the big-debt days — noticed? If not, we’ll send them a copy of the OECD report.