Surpluses

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Yesterday Stephen Harper got to brag that the federal surplus for the first quarter was $5 billion. For a party that makes fiscal (as opposed to economic) issues the centre of their platform this was very good news indeed. Or was it?

If you look back at previous first quarters, you will see that they almost always perform better than any other time of the year. The reason is simple – the first quarter includes April, the month where a lot of people pay their taxes. While tax revenue comes in every month of the year, April is always a little higher. This alone may account for a first quarter surplus when most authorities predict as small deficit for the year. Another explanation is that the government sold off a bunch of GM stocks at a loss while, at the same time, it hasn’t been spending the money they said they would spend – secret austerity that will eventually cripple government services. Still, Harper will brag and the other leaders will question his claims. It’s all politics.

And in any case we won’t have a clearer picture until we get the numbers from the rest of the year which won’t happen until well after the election.

But what does it matter anyway? Obviously surpluses are nice. Who wouldn’t like to make more money than they spend? A certain portion of families do that (the majority have seen household debt rise) – it is called savings. But what – as the banks like to ask – are you saving for? Notice that implication – the banks, those great fiscal conservatives, expect you to eventually spend those savings – on a house or a car or a vacation.

And for good reason. The greatest savers in the world are the Japanese. In part that has led the Japanese economy to stagnate for over 20 years. The government went so far as to introduce negative interest rates in order to stimulate citizens to spend a little money.

So the question is: why do governments want surpluses? The Conservative answer is clear. They want surpluses so they can lower taxes and shrink government programs. Tax cuts always go mostly to the rich and well to do – they pay the most taxes and so get the most benefits when taxes go down. The result is greater inequality and, in the end, greater social costs for health care or law enforcement.

Other people want to pay down the debt. This is not a bad thing but not something that one needs to get carried away with. A stable debt in a rising economy is essentially shrinking anyway. Look at it this way – if you owe $10000 and you make $20000 a year, you have real problems. Your debt is 50% of your income. If your income rises to $50000, it is still tough but you only owe 20% of your income. At $100000, it drops to 10%. At that ratio you would have no trouble managing your debt or paying it off.

With high economic growth, making a fiscal surplus is less important in the short term – though it should still be a goal over the entire 10 or 12 year business cycle.

In the meantime, governments should focus on using any surpluses to improve the lives of all Canadians through social programs that reduce long term costs to society and investments that create long term economic growth.

And that’s ten minutes.

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