The print and TV media recently picked up on a statement in the 2018 Budget that the federal government’s “market” debt would exceed $1 trillion. They reported this as the tipping point for federal finances, as if the government had hit the proverbial “fiscal wall”.
The former Parliamentary Budget Officer, Kevin Page, observed, “the $1 trillion threshold is extraordinarily important”. He looked at this number and lamented the lack of a commitment by the government to eliminate the deficit. The Conservatives, lacking any corporate memory, were quick to pick up on this.
However, nothing could be further from the truth. Under current borrowing procedures “market debt” in its broadest sense exceeded 1 trillion in 2012-13. The government is not facing a structural imbalance between revenues and expenditures or a fiscal crisis; and deficit elimination is not a necessary requirement for fiscal credibility.
In the 2018 Budget, it is projected that “outstanding government and Crown corporation market debt will reach $1,066 billion in 2018-19, including $755 billion in projected year-end government market debt and an anticipated Crown corporation market debt for three of the financial institutions of approximately $311 billion”.
However, these two components of market debt are not the same.
In the 2008 Budget, the Harper Government announced that the Government would consolidate the borrowings of the Canada Housing and Mortgage Corporation (CMHC), the Farm Credit Corporate (FCC) and the Business Development Bank of Canada (BDC) into the federal debt program, rather than having them borrow individually in the private market. It was argued that consolidating the borrowings of these Crown corporations would reduce borrowing costs for them by eliminating the “agency spread”.
However, the budget also stated that the consolidation of these Crown borrowings would not have any effect on the federal government’s debt. This is because assets in the form of loans to these Crown corporations match federal borrowings related to these Crown corporations. In fact, these three Crown corporations are in a net asset position.
It is rather ironic that the Conservative opposition has now raised this as an issue when it was the Conservatives, when in power, who consolidated the borrowings of these Crown corporations. Prior to then, the federal government did not undertake borrowings for these financial Crown Corporations.
Not all Crown financial institutions were consolidated at that time. For example, the Export Development Corporation continues to borrow in the private market. They too have assets matching their liabilities. If the borrowings of the Export Development Bank were included, “market debt” would likely have been exceeded “one trillion” in both 2012-13 and again in 2015-16, while the Conservatives were still in government. It is also expected to exceed $1 trillion in 2017-18.
Unlike the borrowings for these Crown corporations, the market debt of the federal government is not fully supported by offsetting assets. In 2016-17, the last year for which audited financial data are available, the federal government’s market debt was $713.6 billion. Although financial assets amounted to $382.8 billion, most of this was not very liquid and could not be readily used in the event of a financial crisis. The market debt incurred by the federal government was largely the result of financing ongoing operations, unlike that of the Crown corporations.
In the Debt Management Strategy for 2018-19, the two types of “market debt” are listed because the Government again requires borrowing authority from Parliament in order to undertake any new borrowings above certain limits. The Harper Government had suspended this long-standing requirement in the 2008 Budget. In the Liberals’ election platform, they promised to restore this requirement and the government did so in 2017. They are now being attacked by the Conservative Opposition for being “more” transparent and accountable to Parliament than they were.
C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.
From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.
Their Blog is 3dpolicy.ca