$9 Billion Canadian Budget Surplus - Bad News ?

When a $9 billion budget surplus is described as paltry in relation to total debt it causes me to think twice. Sure it made less than a 2% dent in the total debt, and so there may be some justification for calling it a ‘paltry’ in this context. When you look at the bare facts you see that debt stands at $501.5 billion at the end of last fiscal year, down by $61.4 billion over the last seven years. It does not take a mathematical genius to see that this is an average of less than $9 billion per year. It makes no sense to now describe the surplus as paltry.

The Prime Minister Paul Martin in his former role as Finance Minister made his political reputation by slaying the deficit, and helped established the Liberal Party as one of fiscal responsibility (don’t tell Bush since he believes ‘Liberal’ is a four letter word). I would agree that the average Canadian bore the brunt of the pain through cuts in services and high tax rates (I can testify to that having moved here from England). Nevertheless the government has a record that the US President and other governments would be proud of:

- seventh annual surplus in a row;
- federal debt as a proportion of the total economy is down to 41.1 per cent, compared with a peak debt-to-GDP ratio of 68.4 per cent in 1995-96.
- interest expenses at 19.2 % of revenue as opposed to 39% in early-’90s.


So what’s changed ? Thanks to a combination of arrogance, fallout from the $1 billion wasted on the gun registry and the $100 million sponsorship scandal under the watch of the ‘linguistically challenged’ former Prime Minister Jean Chretien the Liberals find themselves as a minority government. As many a minority knows and Sting put it

“Every breath you take.
And every move you make.
Every bond you break, every step you take.
I'll be watching you”

The Canadian budget surplus is certainly generating a lot of fuss. There are those who believe it should have been used to improve health & education or lower taxes instead of paying down the national debt.

There is also belief, especially among the opposition parties and the provincial governments (similar to US States), that the federal government deliberately under forecasts its expected revenues so that it can plead poverty. The provincial governments are very much the Oliver “please sir can I have some more?” Twist to the Prime Minister’s ‘Fagin’.

Personally speaking I look at the $9 billion debt pay down in the same way as my mortgage. Additional down payments now free up future cash flow to fund retirement savings and desires as opposed to needs. In terms of the economy the down payment represents more than $300 million annual interest savings which can be used to fund future education and health spending.