Interest rate rises !

[growler]

 In all the news about marijuana, from Trudeau’s legalization musings to Health Canada’s farming operations, no one has mentioned the drug of choice: Canadian government debt.
And lots of it.
Cast your mind back to 1980. Remember 22 per cent interest rates? Remember 40 per cent plus federal income tax rates, what with surtaxes on surtaxes, and then your province’s piece on top to bring you up to nearly 60 per cent in most of the country?

Since then, interest rates have fallen year after year. Oh, sure, there’s been brief blips upward, but the trend line was relentlessly down.

At the same time, we’ve undergone periodic tax reductions. Income taxes have come down. The GST came down. Corporate taxes have come down a lot.

All of this was paid for by endless piling on of Canadian government debt, as was the continued growth of government, the proliferation of agencies, boards, commissions and tribunals.

What underlay it was leverage, and it works like this.

Let’s say you have a deficit in 1980 of one billion dollars. The bonds written to cover that deficit were issued at 20 per cent interest. That means 200 million in interest payments comes out of the tax base that can’t be used for programs.

Drop interest rates to 15 per cent (which happened by about 1983) and you can refinance. So you borrow one billion at 15 per cent to pay off the one billion at 20 per cent. But instead of reducing your interest requirement to $150 million, you borrow more, holding the annual interest bill more or less the same.

Instead of finding $50 million for programs, the new borrowing finds $333 million (interest on that would cost the amount saved by refinancing).

Lather, rinse, repeat. Keep doing that as interest rates fall to 10 per cent, to 8 per cent, to 4 per cent, to the 1-2 per cent reached a couple of years ago. It’s how we paid for tax reductions and expanded program spending all at once.

At 1 per cent, a $200 million interest bill is sustaining $20 billion in debt.

This may well explain how Ontario, for instance, managed to rack up over a quarter trillion in debt (they don’t call the place Greece on the Great Lakes for nothing) without digging into its schools and hospitals one iota.

But the interest rate long-term trend has turned. After all, when official rates (central bank ones) drop to one quarter of one per cent (as in the United States) there’s nowhere to go but up.

Up is how they’ve been going. The US federal fiscal year ended on Monday. They’d budgeted $270 billion for interest on the US national debt (most all of it refinanced within the past few years to capture low, low interest rates, and most on short term renewals to maximize how low they went).

But bond holders find the debts already outstanding unsustainable, and are demanding more. Actual interest rates being paid on new issues — to cover the on-going deficits and rollover of maturing debt — are up from 1-2 per cent to 3-4 per cent. That added $150 billion in extra interest in the just concluded fiscal year, all of which has had to be financed as well.

Expectations are that another 1-2 per cent will be added during the next twelve months. That, by the way, is if all goes as planned, not if some crisis erupts.

The 2014 US financial projections don’t include that. They projected falling rates. Good luck with that.

Our deeply indebted provinces and our crippled federal government (Canada’s combined national debt is around 100 per cent of our GDP, which Canadians never get told because no one reports the combined federal and provincial numbers, they just report the press releases from the different finance ministries) are in the same boat.

Interest charges are about to eat Canadian government budgets alive as debt rollover and continued deficit spending add to the interest paid out. That means taxes are going up, or programs are being cut, or both.

When the “crisis” comes, you’ll hear a lot of “no one could see this coming.”

You, dear reader, now know better. It is, after all, simply elementary school arithmetic in action.



as with other things from the calgary beacon