Ladies and gentlemen, the free ride is over!
Canada’s Government will be entering an era of severe austerity within the next two years, courtesy of what will be the worst recession since the Great Depression. Here is how this may be addressed by Canada's government so as to remain solvent as effectively and painlessly as possible – all numbers are rough estimates.
The Federal Civil Service
1. Retire those who can already retire on full pensions, and do not replace them.
Upwards of 1,500 people now in the public service are able to walk out the door with a full pension. They should be retired asap as a result of an austerity program, without being replaced. The public service has about 285,000 employees. Cutting 1,500 immediately would represent a modest ½ of one percent cut.
2. Offer early retirement with no penalty to any person who is within 3 years of retirement.
The experience during the Chretien years was that many, many people will take early retirement without penalty if this option is offered. If 75% of eligible public servants took this offer, with well over 10,000 retiring every year, this should reduce the rolls of the public service by over 22,000 employees. Taken with the retirement of persons who are already able to retire on a full pension, this would reduce the federal workforce by about 7.5%. There should be a freeze, in the sense that these employees will not be replaced, resulting in a 7.5% reduction in federal salaries.
3. End Bonuses to Executives.
Bonuses for executives in the federal civil service are awarded almost as of right – I think 98% of them get this pay. I suggest that bonuses do not improve performance to any noticeable degree. In a recession, it will be next to impossible for senior officials to move from the public service to the private sector. Eliminate their bonuses, and pay them like everyone else – they aren’t going anywhere. This should save the federal government about $75 Million a year.
4. Give everyone two mandatory days off each month without pay.
This would be like the Rae Days from the early 1990’s in Ontario. Rather than fire people, with all the related economic disruptions that follow, the provincial government forced employees to take two days a month off without pay. This should temporarily cut federal salaries by another 6%. Taken with the cuts above, this will reduce federal employee expenditures by over 13.5%.
Savings from adjustments to the Civil Service - the federal government pays just under $20 Billion a year to employees in the base public service. A cut of over 13.5% could save over $2 - $2.5 Billion a year.
Taxation
1. De-index Income Tax Brackets, no longer raising them in step with the Rate of Inflation.
This is how Canada got into the Black in the 1990s – by de-indexing income tax brackets, as people earned more money they paid more tax as they were caught by the higher brackets, which remained static. A 5% net increase in revenues from shifts upwards into higher brackets would generate over $15 Billion more in revenue per year. This could happen in as little as three years.
2. Tax Reverse Mortgages.
There are Billions in reverse mortgages now – many Boomers are cashing out on their real estate legacy to live a bit better in their declining years. They have paid zero tax on the increase in the value of the equity in their homes. If they want to treat this as income, not as an asset, it should be taxed as such. A 30% tax on all distributions from reverse mortgages above a basic amount could net $1 - $2 Billion a year, rising every year.
3. Higher GST on Luxury Goods.
If a person can afford a Lamborghini or a multi-million dollar home in the middle of a recession, they can be asked to pay a special excise tax on it. A special 10% GST on luxury goods, including homes above a certain value, could net $500 Million - $1 Billion.
4. CUT the GST by One Penny on All Other Goods.
This will cost the treasury $6 Billion a year, but will be needed to stimulate growth. In short, raise the taxes on the wealthy, but cut the taxes of everyone else, in such a way that makes spending less expensive.
5. CUT the EI Premiums by 10%.
This will cost the treasury $2 Billion a year, but will make hiring less expensive. Taxing jobs in a recession is stupid.
6. Tax The Firing of People.
Apply a special tax on redundancies – if a business fires people outside of a bankruptcy, it should have to pay a special tax. It should be blunt and brutal – they could have to pay $10,000 for every person they let go.
The point is not to raise revenue, but to have businesses keep people working even at reduced hours rather than have mass layoffs. This is about avoiding costs – it could save billions of dollars in EI and welfare payments, and help avoid mass disruptions in the real estate market etc., as these people will still mostly be able to make ends meet. This is Rae Days for the private sector.
Revenues changes from Tax Initiatives – about $10 Billion more a year after a few years.
Other Spending Initiatives
1. Transfer to Provinces.
DO NOT cuts transfers to the provinces and territories for medical and social services, but limit the rate of growth to the rate of inflation.
The number one initiative for returning to fiscal health is the de-indexation of income taxes, not outright spending cuts. Lowering the rate of growth to the rate of inflation will flat line expenditures in real terms – this is about limiting spending growth, not cuts.
2. Tie Foreign Aid Closer to Trade.
Canada spends about $10 Billion a year on foreign aid. If the countries that receive this aid will not enter into free trade agreements with Canada, then Canada needs to reduce or eliminate this funding. Free trade will allow for economic expansion going forward. This could save $1 Billion a year.
3. Build all Military Equipment Here.
If we are going to spend tens of billions on military equipment, it should mostly be built and the money spent in Canada. If a company bids for a contract, and at least 75% of the money will not go to Canadian businesses, they should lose - we likely need to say "No" to the F-35. This will buttress local economies on the East and West coasts for shipping; in Montreal for aircraft; and in Ontario for vehicles.
4. Cut Business Subsidies....Slowly.
Canada spends about $15 Billion a year in subsidies to business – direct payments, tax deferrals etc. This should be cut by 40% over five years to wean business off this support and force business to compete. This will eventually net the government about $6 Billion a year.
5. Flat Line all “Discretionary” Spending for Two Years.
All other federal spending should be frozen for two years. This could reduce future expenditures by about $10 Billion within a few years.
Total net fiscal change for the federal coffers would amount to about $30 - $32 Billion a year by Year Three, while at the same time reducing some taxes so as to stimulate growth.
This is going to be awful. We need to tackle this head on...
CAVEAT!!!
There is one fairly disastrous possibility that may throw even a vigorous response to a new recession onto the dust pile of history...
1. Debt Downgrade.
We are awash in debt. Canada's federal debt is about $735 Billion, or 30.5% of GDP. On its own, this is not a problem, and many political commentators note that as long as the debt-to-GDP ratio on the National Debt is falling, all is well.
But it is completely misleading to count only federal debt when discussing public debt in Canada as the provinces also float bonds. Ontario, for example, is the most indebted sub-national government on planet Earth.
Adding provincial debt Canada's total public debt is a whopping $1,237 Billion and the debt to GDP ratio is about 90%. Again, this may not be overly worrisome as many developed countries have much higher debt to GDP ratios.
However, when you count total debt owed by Canadians, this starts to look very bad.
Canadians owe, on average, well over $52,000 per person in total external debt (owed to foreigners), both public and private. This is 115% of our GDP.
Besides having a massive public debt, Canadians are also the most indebted persons on Earth in terms of their overall personal borrowing (think credit cards and mortgages).
Given this, Canada is VERY vulnerable to a significant public debt downgrade, because debt rating agencies will not look at on the federal debt or even total public debt, but they will look at total net debt, and the ability of Canadians to finance ALL of their debts.
A debt downgrade would imperil our ability to keep borrowing money, as it would force us to borrow at higher rates of interest. With unprecedented levels of personal debt, and very high public debt, the reality is that Canadians may find that they simply cannot finance all of this debt at the some time while economic activity is contracting during a recession.
The option that has been used by countries in these circumstances in the past has been to stop paying the capital on bonds as they come due, and to only pay the interest. But this desperate measure would effectively block us out of world borrowing markets, forcing us to live within what would be declining means in a recession. This would strike a hammer-blow Canadian standard of living, which has been relying on borrowed money for generations now.
Let's hope that we can get finances back in order in time to convince bond rating agencies that we know what we are doing, and that we are still able to finance our obligations.
CAVEAT!!!
There is one fairly disastrous possibility that may throw even a vigorous response to a new recession onto the dust pile of history...
1. Debt Downgrade.
We are awash in debt. Canada's federal debt is about $735 Billion, or 30.5% of GDP. On its own, this is not a problem, and many political commentators note that as long as the debt-to-GDP ratio on the National Debt is falling, all is well.
But it is completely misleading to count only federal debt when discussing public debt in Canada as the provinces also float bonds. Ontario, for example, is the most indebted sub-national government on planet Earth.
Adding provincial debt Canada's total public debt is a whopping $1,237 Billion and the debt to GDP ratio is about 90%. Again, this may not be overly worrisome as many developed countries have much higher debt to GDP ratios.
However, when you count total debt owed by Canadians, this starts to look very bad.
Canadians owe, on average, well over $52,000 per person in total external debt (owed to foreigners), both public and private. This is 115% of our GDP.
Besides having a massive public debt, Canadians are also the most indebted persons on Earth in terms of their overall personal borrowing (think credit cards and mortgages).
Given this, Canada is VERY vulnerable to a significant public debt downgrade, because debt rating agencies will not look at on the federal debt or even total public debt, but they will look at total net debt, and the ability of Canadians to finance ALL of their debts.
A debt downgrade would imperil our ability to keep borrowing money, as it would force us to borrow at higher rates of interest. With unprecedented levels of personal debt, and very high public debt, the reality is that Canadians may find that they simply cannot finance all of this debt at the some time while economic activity is contracting during a recession.
The option that has been used by countries in these circumstances in the past has been to stop paying the capital on bonds as they come due, and to only pay the interest. But this desperate measure would effectively block us out of world borrowing markets, forcing us to live within what would be declining means in a recession. This would strike a hammer-blow Canadian standard of living, which has been relying on borrowed money for generations now.
Let's hope that we can get finances back in order in time to convince bond rating agencies that we know what we are doing, and that we are still able to finance our obligations.
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