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Debt and Deficitin ContextJim Stanford, Economist, Canadian Auto Workers
For Canada 2020 Pre-Budget Seminar
Ottawa, January 2011
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Government Debt
0%
10%
20%30%
40%
50%
60%
70%
80%
90%
100%
1990 1995 2000 2005 2010
N e
t F i n a n c
i a l D e b t , a
l l L e v e
l s % G D P
.
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A ´Chill Pillµ:
The Debt Stability EquationD/GDP = (i-y)D/GDP + DEF(prim)/GDP
i (fed) = 5.8%y (2Q) = 6.7%
fed = 32% fed = 1%
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A ´Prototypeµ Recession Star t with balanced budget Nominal GDPdecl ines 2.5% f or one yea r Then nominal GDPgrows at 5%Deficit rises to 3% of GDP in recess ionDeficit eliminated over 8 y ea rs
10-yea r bu dget c ycleDebt is sta ble, with no surpluses
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A ´Prototypeµ Recession
0%
10%
20%
30%
40%
50%
1 2 3 4 5 6 7 8 9 10
D e
f i c i t & D e
b t a s
% G
D P
.
Debt DeficitBack to
30%
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Canada Has No Deficit ProblemDebts are low by histo rical and inte rnat ional standa rds .Deficits are clea r l y c yclical. Inte rest rates are low (and likel y to remain the re).
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W hy W e May WA NT
Continuing Deficits Recovery is sluggish, fr agile, slowing. Recovery (so f ar) has been driven by
consumers, government . Recovery in business invest ment and expor ts has been slow, leaving an
economic vacuum.
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A n ´ A nimal Farmµ Theory
of Debt
´ Private debt good, private debt bad .µ Like an y othe r b orr ower , public debt makes sense to finance product ive long-lived assets .
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Peak to Trough and Back3.3% down (3Q 08-2Q 09 )3.6% up (2Q 09 -3Q 10) Level of GDP recove red . Composit ion of growth has changed .
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-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
C G H I Net X Oth
% C
o n
t r u
t o n
t o G r o w t h
eak to Tr ough
Tr ough to Now
Business Leads the W ay Down«
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-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
C G H I Net X Oth
% C
o n
t r u
t o n
t o G r o w t h
eak to Tr ough
Tr ough to Now
«Then Sits on the Sidelines
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W here Is The Engine?
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Business Investment
160
170
180
190
200
210
2006 2007 2008 2009 2010
B u s
i n e s s
N o n - R
e s
i d e n
t i a l C a p
i t a l ( $ b i l )
.
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Exports
420
440
460
480
500
520
540
560
580
600
620
2006 2007 2008 2009 2010
E x p o r t s o
f G o o
d s a n
d S e r v
i c e s
$ b i l
.
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Borrowing by Sector ($b)
$0
$50
$100
$150
$200
$250
Cons me s Gove nments B sinesses
N e w
B o o w
i n Q
2 / 0 8
- Q 2 / 1 0 $ b
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Elephant in RoomFede ral-pr ovincial t ransf ers.Provincial fiscal const raints are much more se rious than f ede ral. Balancing f ede ral budget by
´
pass ing the buckµaccomplishes noth ing:² T ransf ers debt to highe r-i nte rest
borr owers.² Th reatens necessa ry invest ments in human
and soc ial capital .
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Growing Gap
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Alt S k fld d Ont M n Qu S PEI
G D P /
p .
( 2 0 0 9 )
2-t o- 1
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ConclusionsDon·t panic on de ficits . More st imulus (not less ) needed unt il business sta r ts working.Fiscal f ede ralism needs to get st ronger(not weaker) to recogn ize unevenness ofreso urce dependence and de indust rializat ion.
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A lternative Federal Budgetwww.polic yalte rnat ives .ca
Released in mid-Febru ary
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