Fiscal conservatives , including the large number in Parliament were overjoyed by the huge federal surplus. The situation is even more appalling when we factor in the surplus of the provinces. The total federal and provincial surplus for the past fiscal year stands at 26.4 billion dollars. Think of all the good repair of our health care system,educational, social and physical infrastructure and our military that could have been accomplished with these funds. Think of how much larger the surplus would have been if the unemployment rate were 2 percentage points lower. OR if you prefer think of how much lower taxes would have been if the government had correctly forecast revenues and budgeted for a balanced budget and cut taxes. However you look at it is is both sad and foolish to see the entire surplus being spent on debt reduction. The federal debt to GDP ration is now 34 % and falling simply because of the growth in the economy. AS the economy grows the GDP grows larger and therefore the denominatior in the ratio of debt which is not growing so long as there are no new deficit additions to it to HDP shrinks in any case. It is not necessary to spend the entire surplus on debt reduction.
We are now at 33.7 debt to GDP ratio. If the federal government
simply runs balanced budgets by spending surpluses on either programmes or tax reductions and growth continues to average 3 % over the next seven years the ratio will fall to under 30 %.Remember that a debt to GDP ratio below 30 % is among the lowest in 80 years of data.
Even if over the next 14 years there is a recession or even two and a temporary deficit is necessary so long as average growth over the 14 years exceeds the real interest rate charged on the debt the debt to GDP ratio will continue to shrink. There is lots of room for a more creative debt and growth inducing debt management policy in Ottawa.
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