By Miles Clyne
Fiscal Policy is the collective term for the taxing and spending behavior of governments. The fiscal/financial success or failure of past and present governments shows up in the total debt of a nation, which is the accumulation of annual deficits. It’s important to note that a declining deficit does not suggest a government is behaving prudently, it may be the opposite. But this is not the sales job you hear from any party in power.
In Canada, our current Minister of Finance Bill Morneau and our Prime Minister are at it again. They are attempting to “sell” the general public their recent fiscal update. They want us to believe that in a time of prosperity and above average growth in our economy, it is a time to increase our national debt.
The most basic of finance theory suggests that it is in the good times when you put away savings. The simple truth most of us know is the good times don’t last forever. And if you can’t save in the good times, you surely are not going to be saving in the bad times, so the debt never goes away, just gets larger. Their promise to balance the federal budget by 2019 is now another broken campaign promise. And sadly, just balancing the budget does not improve the government’s indebtedness. It merely maintains the amount of debt you have at the present level.
Do your own math, if you take home $3,000 per month after taxes. If the first bite out of your $3,000 is $2000 in loan payments, you now have $1,000 to see you through the month. Clearly the budget of a country is a lot larger, but the logic is identical. You only get to spend what is left after you pay what you owe.
It doesn’t take an economics professor to see the short sightedness of increasing debt and deficits in the good times. When the good times end, tax revenues fall, programs and benefits are cut. Who do you think will be impacted the most? Typically, it is the folks who have the least. The poor and the young come to my mind immediately. Oddly, these are the very people our government says they are looking out for.
Perhaps if both Justin and Bill had actually earned their fortunes as opposed to inheriting them, they would appreciate what it takes to succeed. Never in their lives have they ever had to think about the basics: food, clothing and shelter, nor have their children. It is very understandable that they are out of touch with what the average person goes through every day, as well as what an economy needs in order to succeed long term.
Fiscal intelligence comes from the basics, like appreciating that the good times are often the only opportunity to eliminate deficits and pay down debt. When the hard times come, governments then have better tools. Their cash flow is higher because of less debt, so programs don’t have the same risks of being cut. And they have more flexibility to borrow if necessary to help stimulate the economy. The ultimate benefit is more stability to the economy and people.
Many families and businesses live though these cycles repeatedly. If your family never needed to appreciate the concept of a rainy-day fund, the logic may make little sense to you. The saying my wife kept repeating to our kids when they were little rings in my head; better to have it and not need it, then to need it and not have it.
It will take years and possibly decades to tally the impact fiscal mismanagement from our governments has on our country. Just like bad money management often does not show up personally for some time. If personally you carry a lot of debt, and you’re managing to keep up with your payments all can seem OK. But what are your risks if interest rates increase, or a lay off or injury happens in your family? Do you have options?
Keep in mind if you look to our leaders as examples, they are not playing with their own money and they have the right to raise taxes to make up for their misbehavior.