Deficits and debt
Gywn Morgan, the founding CEO of Encana Corporation, a successful Canadian energy company, joined the chorus rejoicing at the failure of Greece’s social welfare state. In his May 17 column in the Globe and Mail Report on Business, he emphasized: “The EU is plagued by high unemployment, idleness facilitating social welfare programs and demographic decline.”
Although he did not state explicitly that the current crisis in Greece and many other parts of the EU will force these countries to make draconian cuts in government spending on social and other programs, he implied that this course of action was necessary for the financial markets would accept nothing less. Many economists see this crisis and the enormous deficits in the U.S. and elsewhere as the lever to force governments to reduce their footprints on their economies. On a regular basis we hear warnings that impending debt walls will push governments in this direction because the financial markets are not forgiving.
Out of curiosity I looked up Encana’s latest financial results. According to the company’s 2009 annual report, its long-term debt (a modest $7.6 billion) equaled 68% of its revenues. Since the company’s credit rating has held up well, it appears that the financial markets are quite pleased with this debt-to-revenue ratio. Yet the same does not appear to be the case when a government’s debt-to-GDP ratio reaches this level.
Of course, the automatic response is that companies such as Encana borrow to finance value-enhancing investments, as they should. But what about government spending and debt? Don’t some or all of the following government expenditures enable the private sector to be more productive, competitive and successful: infrastructure, education, healthcare, training, research, the judiciary and security/protective services? Don’t part or all of these expenditures make the value-enhancing investments of companies such as Encana even more value enhancing?
Absolutely! So doesn’t it make sense that these expenditures should be financed in part through debt? Why should investment expenditures by governments be treated differently than similar investments by the private sector?
Furthermore, many economists are arguing that most of the efforts to reduce government deficits to “sustainable” levels must come primarily form spending cuts. Tax rates should not be increased because this would diminish the incentives for people and companies to make value-enhancing investments. But as I have suggested before, this is only a ploy to eventually get governments to significantly reduce their presence in their economies.
Interestingly, the current debates about massive government budget deficits and rapidly rising debt-to-GDP ratios rarely look at the Scandinavian countries as an alternative for dealing with these problems. The economies and public finances of countries such as Denmark, Finland, the Netherlands and Sweden have performed better than those of the U.S., the U.K., Canada and Germany during this past economic recession.
According to OECD data for 2009, general government revenues range between 54% and 55% of GDP in three of these Scandinavian countries – the Netherlands being the exception with a 46% rate. By comparison, general government revenues range between 30% of GDP for the U.S. to 40% for the U.K. and 44% for Germany. (Canada comes in at 39%.)
Perhaps the solution to the deficit and debt problems lies in raising both taxes and spending, with the rate of increase in government spending lagging.
There is no single solution. Each country will have to find its own solution, and tax increases most likely will have to be part of every country’s solution.
Instead of buying into the nonsense that salvation from the debt wall requires massive spending cuts and smaller governments, maybe each country should take this opportunity to examine what programs it wants, the size of each one, how they should be delivered, and how they should be financed. I suspect that the outcomes of such analysis will not be a convergence in the size of governments and tax rates.
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.