Thursday, April 30, 2009

The Age of Thrift is Upon Us

One of the ways we can look into the future is by understand the indebtedness of a country. It is simple really. If a country owes more than it generates in income from producing goods and services, then that country relies on lenders to support it and will have to reduce its government services while at the same time increasing taxation. At some point, cuts to services and tax rises become a condition of people continuing to lend them money – like the IMF or China buying US government bonds. On the other hand, a country that owes nothing but produces significant income from goods and services can expand government services without significantly raising taxes. The way in which we normally look at the future in this way is by looking at government debt as a percentage of GDP.

When we look at this number for 2008, we get some interesting idea of the state of things when the recession was just getting going. Remember: zero percent would be remarkable, but very good. The US had 75% debt to GDP, Canada at 63% and the UK at 47%. In fact, Government debt in the UK was at £697.5 billion ($1232 billion) as compared to just 30% of GDP in 2002 – a steep rise. The April 22nd budget forecast was for debt, by 2013, to reach 75% of GDP. Not at all good.

If this isn’t bad, it gets worse. Many analysts point out that the official government debt figures exclude certain liabilities – for example, the government’s pension commitment to its employees and to citizens, its bail out of the banks which, though may be paid back, may not, and so on. The Centre for Policy Studies argues that the real national debt is already £1,340 billion ($2,370) – worse than not at all good – it is 103.5 per cent of GDP.

But this pales into significance when we turn to the US. As of April 7, 2009, the total U.S. federal debt was $11 trillion ($13 trillion Canadian) - about $36,676 per capita. After Obama’s budget is passed, this will rise to $15 trillion – 75% of estimated GDP by 2013, assuming an economic recovery and significant growth from 2010. Like Britain, the US has unfunded liabilities for health care, pensions and bailouts. As of the beginning of April, when these are added to accepted national debt, the total indebtedness of the US is $53 trillion ($63 trillion Canadian) – very not good. Most of the official debt is held by China and Japan.

Canada has a national debt of app. $461 billion - $13,771 per capita – half the per capita debt burden of the US. Though this represents 53% of GDP, we have a long way to get to get to the major debt leagues. Even the worse case scenario forecasts for post 2009 budget debt, takes us to the top of the first division – well below other G7 members.

So we look in the mirror as Canadian’s and see generally strong position. But our British friends are nor braced for much higher taxes (especially if they earn £150,000 a year or more – the so called “rich”) and deep cuts in services. Our southern cousins are looking at the temporary expansion of government activity – car dealerships, intrusions into health, more spending on education – followed by tax hikes and budget cuts. Lenders will start to get particular about the extent and cost of state services – watch for the lending market getting tighter as more and more governments both print more money (called “quantitative easing” in Britain, isn’t that nice) and seek to borrow more at the same time. Someone is going to call “time” on this brand new government sponsored Ponzi scheme. Thirft will be the name of the next decade.

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