Empty net economics
How the Conservatives are deking the debt issue
BY Ellen Russell
Photography by J.P. Moczulski/Reuters
Like any good hockey fan, Stephen Harper dreams of playing the hero. But so far he hasn’t scored any highlight-reel overtime winners. Instead, he has recently tried to convince Canadians that an empty net goal is just as worthy of being named first star.
It bugs the Conservatives that the Liberals get the bragging rights for eliminating the deficit. Sure, the Liberals trashed social programs to do it, but on the level of sound bites, deficitslayer has a nice ring to it. Harper has no comparable claim to fame. And a guy who is manoeuvring for a majority in the next election dearly wants to ride his stick at centre ice. So in November, the Conservatives announced their new bid for political superstar status: they will eliminate the debt by 2021.
Hold the phone. The net federal debt is about $482 billion. The Conservatives have promised to pay down $3 billion annually. At that rate, you need some pretty wacko math to get to zero debt in 14 years.
Here’s where this impossible-sounding calculation originates. For years, public debate about Ottawa’s debt focused on the so-called “net federal debt” (that $482 billion). But now when the Conservatives talk of “paying off the debt” by 2021, they are talking about the “net national debt.”
And what, pray tell, is the “net national debt”? Well, it’s a measure that includes the net federal debt, plus a bunch of other stuff, including the net debt of provinces and municipalities, plus the net assets of the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP).
Even if Ottawa doesn’t pay a cent on the federal debt, the net national debt will eventually reach zero if the pension plans perform as projected. By about 2021 the net assets of the Canada and Quebec plans are estimated to be in the neighbourhood of $427 billion. By that time, the federal debt will be about $437 billion if Harper pays down $3 billion in debt per year.
Unfortunately, the new debt target doesn’t make any sense. Most folks figure that paying off debt will save money in the long run. Indeed, Harper’s “Advantage Canada” manifesto claims that paying off debt frees up funds for health care and other public services. But if our net national debt hits zero thanks to the CPP, Ottawa won’t be any better off, since the pension money is earmarked for retirees. Harper’s successor 14 years hence won’t get to spend it.
So, let’s say Ottawa does pay down the federal debt. A dollar spent on debt paydown is a dollar Harper doesn’t have for the infrastructure that he acknowledges Canada needs. How will he pay for infrastructure? He will use public-private partnerships, or P3s. P3s involve for-profit companies that build infrastructure. And to build this infrastructure, P3s borrow money.
In effect, P3s move debt that would have shown up on the government’s books onto the private sector’s books. But there is a catch. Private companies pay more to borrow money than the government does. The amount that P3s charge to provide infrastructure has to reflect these higher costs (plus a profit margin). So the payments that government makes to P3s are higher than would be the case if the government just borrowed the money itself.
Ask economist Hugh Mackenzie. (He is credited for figuring out that building the Brampton hospital via a P3 deal cost $175 million more than if the government had done it.) “It can’t be cheaper to pay someone to borrow money for you when it costs them more to borrow than it costs you,” says Mackenzie. “P3s are a very expensive way to build public capital.”
A more realistic portrayal of the government’s indebtedness would add in P3 debt. We could call it “total taxpayer-backed debt.” Because whether the government pays interest on the debt or fees to the private sector, Canadians still have to pay. Let’s see Harper try to score if we used a measure of debt that really mattered.
