Last week Prime Minister Stephen Harper revealed that Canada’s expected budget deficit is $50 billion and rising. That’s a lot of money. Especially compared to the deficit the Tories were predicting before the last election. Then, they said there wasn’t going to be a deficit.
Zero, $50 billion. Big difference.
But as CBC economics reporter Mike Hornbrook pointed out to me the other day, we may be making too much of that figure. Fifty billion dollars is without a doubt a big absolute number — but absolute numbers aren’t what matters.
It’s all about perspective: $200,000 is a lot for a car, cheap for a house and chicken feed compared to a banker’s bonus.
The point Mike wanted to make was that a country’s debt is relative. The correct way to look at deficits and total public debt is to measure them relative to a country’s total economic clout. For that we generally take total debt, which is a country’s deficit accumulated over the years, and compare it to gross domestic product or GDP.
The United States’ economy is huge, but so is its debt. Its debt-to-GDP ratio is about 97 per cent and most people expect it to head over 100 per cent.
Canada’s economy is a lot smaller, but our debt-to-GDP is hovering around 30 per cent. Compared to most large economies, that’s really not bad.
A country’s finances are very different from yours and mine. We can’t print money (at least, not without being put in jail), while Bank of Canada Governor Mark Carney can. Lucky guy.
There are other differences too.
When you get a mortgage to buy a house, for instance, the bank gives you the lump sum today on the strength of your next 25 years of projected income. First-born not accepted as collateral.
The reason a lot of people don’t want the government to sink further into debt is that older Canadians have seen the effect.
A country borrows based on its future income too. Canada’s future income includes the taxes you will pay in your lifetime. But in the case of countries, the first-borns are included in the calculation. Not only that, but all the unborn future taxpayers as well. That’s because a country, unlike you, does not have a limited lifetime. That lets countries borrow against the stream of tax income far into the future. That’s a lot of borrowing.
Now the downside.
The reason a lot of people don’t want the government to sink further into debt is that older Canadians have seen the effect. Not long ago, when interest rates were higher and our public debt worse, interest payments on the public debt — the national mortgage payment, if you will — soaked up about 25 cents out of every dollar a person paid in taxes. When the economy weakened further, the government of the day was forced to spend. But with so much going in debt payments, the government had to borrow even more to spend.
Canada was like a subprime mortgage borrower.
Getting out of the spiral was a painful process. It involved lots of politically unpopular cuts and downloading. That’s why many people are fearful not of the absolute $50-billion deficit, but that it will grow and accumulate, sending us back into an upward spiral of debt.
A friend who works with me at the CBC recently proposed that this was a good time to take on debt because interest rates are so low.
That’s fine if the debt is short term, say for a new flat screen TV to watch the big game.
But if the loan is for the long term, like a mortgage or the national debt, it’s a different story. Unless we slip into deflation, which is looking less likely, borrowing could well be as cheap now as it will ever be in your lifetime. In other words, interest rates have nowhere to go but up.
In times like these, paying down a mortgage may be the best investment you can make.
First, stock markets are weird. They have had a nice run, but who knows when they will turn tail.
As we discussed on CBC News Business last week, fixed income alternatives aren’t much better. “High interest” savings accounts are paying about 1 per cent. Bonds pay more, but every time bond interest rates rise, the face value of existing bonds with lower rates plunges in value.
However, paying a little extra off your mortgage is an investment made in heaven. No matter what happens to the value of your home, the absolute amount you owe will still be on your books.
A lot of people forget that paying off a mortgage is exactly the same as investing the money in an interest-bearing, fixed-income security. With advantages.
In other words, paying off the debt is the same as getting bond interest on your money equal to your mortgage rate. Without any management or broker fees. No matter how good a rate you have, it is probably many times the current fixed income interest rate you could get. It is certainly better than what you will get at a high interest bank account.
The way to think about how much money you will make is to find one of those online mortgage calculators that show how much you shorten your mortgage when you make an extra payment. Every time you pay a little extra on your mortgage the amount of time you will be paying the mortgage shrinks. Every month it shrinks, that’s exactly the same as getting an increase in your disposable income equivalent to your monthly mortgage payment.
And here is the very best thing. The money you “get” (because you no longer have to pay the bank) will be tax free.
Sometimes a person, or a country, has things that require spending now. For a person, it’s clothes for the kids, little things like food and bus tickets. For a country it’s EI payments, bailouts, stimulus. It is okay to go a little into debt for the short term.
But whether a country or a person, paying down debt can pay off in the long term.
Moishe Alexander compares Canadian and U.S. deficit
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