At a recent closed-door meeting with some European and American politicians in Washington, D.C., one former prime minister of a European Union (EU) nation queried out loud as to how Europe could create jobs.
He thought the current obsession in the United States and Europe with reducing deficits was a mistake. Another politician argued that Europe’s social welfare model was a stunning success and must be preserved at all costs.
In my presentation – I was there to brief those present on how Canada’s provincial and federal governments achieved balanced budgets in the 1990s – I tried tactfully to point out that if it’s jobs you want, it’s probably not a good idea to run public finances into the ground by piling up ever-more public debt.
After all, business leaders who have a buck or a billion to throw around will likely look at your country and assume that significantly more debt equals significantly more taxes, at least eventually.
The let’s-just-run-up-more-debt crowd includes even Nobel-Prize-winning economist Paul Krugman. That’s evidence that even smart people can forget how the private sector works. For instance, when people think you’re a risky borrower, they might demand higher interest to compensate for the elevated risk or they might stop lending money altogether.
The Krugmans of the world assume that despite the level of the visible public debt (incurred from spending beyond government revenue) or of the off-the-books debt (liabilities built up by promising public-sector pensions and other items on behalf of future taxpayers), the rest of the world will always hand over another billion or trillion dollars to fiscally drunk governments.
The 2008 financial crisis should have popped that balloon; bank lending froze up precisely because of concerns over creditworthiness. Greece should also have thrown cold water on the errant notion that countries can borrow their way out of difficulty ad infinitum.
What’s spectacularly fascinating about the more-debt brigade is how it also assumes, as some of the European politicians did at this recent conference, that the social welfare state is an accomplishment.
Fact is, the debt explosion, be it in EU countries, in the United States at the federal and state levels or in Canada, resulted from the attempt to buy a social welfare model on the cheap. Over the decades, Europe has had higher taxes while the U.S. had lower taxes; Canada was somewhere in-between. But all, regardless of the tax levels, borrowed massively to finance present-day public- sector spending.
In Canada’s case, where so many assume our leaders have been responsible because once in 50 years a few politicians cut spending, the federal debt was nonetheless $519 billion at the end of fiscal 2010. Total provincial debt added up to $388 billion. That’s $907 billion in federal-provincial debt, but it doesn’t include all the red ink in the past year. (I’m using March 2010 figures from the federal finance department’s fiscal reference tables, which have not yet presented 2011 data.) Nor does it include unfunded liabilities.
If I could wave a wand and re-start federal and provincial budgets post-Second World War, I’d ensure pensions and other social program funding were financed via individual but mandatory savings accounts. That would have avoided the worst excesses of the buy-now, pay-never welfare state.
I can’t perform such magic, but I can outline some sense of how often this deferred financing mentality has been in play. It will provide context for the claim the unfunded welfare state was a successful model in Europe or anywhere else.
In Canada, consider how many deficits the federal government alone has incurred in the half-century leading up to the 2010-11 fiscal year: 37 years were in the red; only 13 were in the black.
In other words, governments ordered the public policy equivalent of pizza (many times over) but sent the bill to future generations. That’s not a successful model of anything. And as Europe and America are finding out, it’s not sustainable either.