By Glen Korstrom
Canadians are irrationally smug about their country’s ability to manage debt better than its G8 counterparts, according to Peter Brown.
The investment industry veteran said that provincial debts, which are frequently overlooked, should be ringing alarm bells across the country – particularly given how high debt loads have prompted recent austerity measures in Ireland, Greece and Britain.
The U.K. plans to chop almost 500,000 public-sector jobs over several years, scale back departmental budgets, cut welfare and hike university tuition fees.
Brown theorized that if Canadian and provincial debts, as a percentage of gross domestic product, aren’t reduced, interprovincial bickering could increase and spark “a serious backlash” from the three westernmost provinces.
“I don’t think we’ll separate,” he said, “but we’ll have some cranky people.”
Brown, with a partner, bought what became Canaccord Financial Inc. (TSX:CF) for $23,000 in 1968.
The Vancouver-based investment brokerage company posted $577 million in revenue in the year that ended March 31, 2010.
“The feds have flexibility if they want to wind down their deficit and wait for economic recovery,” Brown said. “They could lay off 2,500 guys in fisheries and you’d never know they did it. The provinces don’t have any flexibility.
“Last year, for the first time on average across the country, health care consumed 50% of provincial budgets. It’s lowest in B.C. at about 44% or 45%. Health-care spending is crowding out everything else. The baby boomers are only 64 years old, so health-care costs are going to go up. We have a serious problem.”
Brown pointed out that as health care consumes an ever-greater share of provincial spending, the provinces will have less money to invest in education. That, he said, will make future Canadian workers less capable and less efficient.
“Our biggest problem is our productivity,” Brown said. “Twenty years ago we were $2,600 per capita in GDP lower than the Americans. Now it’s about $9,600 lower.”
Brown added that Canada had a weak dollar for so long that local manufacturers got away with being “bad managers” who failed to invest in technology. He said employers also failed to negotiate hard enough with unions.
“We didn’t make the investments in productivity that the Americans made in the 1980s. They made them to compete with Japan. Then, in the mid-1990s, their productivity went up and that drove the stock market,” he said. “Now we’ve got a high dollar, and our lack of productivity really hits home.”
One potential consequence of low Canadian productivity and rising deficits and debts is that the federal government will be pressured by Ontario and Quebec, which have the largest accumulated debts and two of the three largest deficits as a percentage of GDP (along with Prince Edward Island).
Brown said the combined political muscle of the two large provinces could prompt Ottawa to start taxing natural resources to generate revenue.
“My fear is that somewhere along the road in the future, they try to put their hands back in the resource well,” Brown said. “Then, you’ll have a serious debate from Saskatchewan, Alberta and B.C. about the value of Canada.”
Department of Finance figures confirm that provincial government debts have grown much faster than federal government debt during the past 25 years.
Back in 1987, Ottawa’s $281.8 billion debt was 78% of the $362.1 billion combined debt of the provinces and the federal government. That percentage fell to 60% in 2010.
Department of Finance figures show federal debt now at $582.5 billion; the provinces combined owe $388.3 billion.
B.C.’s total debt in its March budget was to be $47.8 billion in 2010-11 and $55.9 billion by 2012-13.
“Interest rates are low. So our debt-servicing costs are relatively low,” said Maureen Bader, who is an independent financial analyst.
“Back in the 1990s, $0.30 of every tax dollar had to be used for debt-servicing costs. Right now, debt-servicing costs aren’t as high. They’re still very high, but not as high. When interest rates eventually go up, then that debt-servicing cost will go way up. Ultimately the way governments get out of debt, especially debt that’s this bad, is to debauch the currency. They do a big devaluation, because increasing taxes to pay off that debt is just not on for politicians in a representative democracy.”