by Alex Lopez-Ortiz
alopez-o@unb.ca
Every single day, early in the morning, a bogeyman enters your house, and without disturbing you or your family he walks away with 15 dollars. Over a year, those 15 dollars amount to 5,375 dollars. Five thousand dollars that you loose every year which won't be used for building roads, or paying doctors in a hospital, or for your child's education. Neither will they be used to reduce the Canadian debt: They will only pay for interests on the current debt. The situation is untenable, and if not acted upon the consequences may be dire. Let's have a look at other countries.
Late last year, Mexico entered what was termed "an economic emergency". That country depleted it's dollar reserves and a 50% devaluation of its currency ensued. In some troubling ways, Canada is showing some of the same symptoms as Mexico did just before the latest crisis. All countries have some maneuvering space that allows them to avoid disaster, but once it occurs, it may take over a decade to recover from the impact; that is why it has been equated to hitting a wall.
Hitting the debt wall occurs when a country depending on foreign debt and/or investment to subsidize their budget or commercial deficits stops being the recipient of foreign capital flows. The lack of foreign capital flows reduces the demand for the local currency. The increased supply of local currency together with an increased demand for dollars causes then a significant devaluation of the currency. Imports as well become hard to come by, be it Japanese VCRs or raw materials for toothpaste containers. This hurts the industrial base of the country since it can no longer afford to buy those imported supplies needed for production. Further, any obligations in foreign currency are now significantly more expensive to service both for the government and businesses.
Canada does depend heavily on foreign funds to finance the federal and provincial deficits, and the situation is reaching such critical stages that The Wall Street Journal went as far as to state that Canada is now a third world country, in what it seems to be a calculated exaggeration designed to attract the attention of Canadians to our national financial woes. If at any time foreign investors lose their confidence on Canada's ability to meet her obligations, either because of the dismal state of her internal finances or because of a political event Canada will hit the debt wall head on.
The former may happen if the Liberal government does not proceed with further budget cuts. Investors, who are more worried about the security of their monies than political considerations will demand Draconian cuts to social services. It is Mr. Martin's job to balance political will for social cuts and external demands on the budget.
A political event such as an ill thought declaration by Mr. Parizeau may instill in the minds of investors the -perhaps misguided- impression that the country will separate, and that the time is right to bail out and stop acquiring Canadian monetary instruments.
Back in 1989, there were already troubling signs for Canada. The debt was growing too fast and the Mulroney government was doing little to stop the deficit. The debt wall was still far away down the road, though the country was already on its way there. At the time the country, and its set of primer ministers and premiers were too obsessed with constitutional talks to pay attention to any of those considerations.
In part due to Manning's horn blowing tactics, Canadians are now significantly more aware of their debts problems. Canada is not alone in its problems. Many other countries, rich and poor alike, find themselves -or found themselves in the past- in similar conditions. Some of them, like New Zealand and Australia, were able to turn around and seem to have survived quite well. Others such as Spain, Italy and to a certain extent even the US, suffer the same financial problems, though the severity varies wildly. Mexico at first seemed to be on its way to recovery, but what was a relatively small miscalculation in their economic program was turned into a major disaster by the lack of confidence from foreign investors in an economy which had posted a 4.5% GDP growth and a budget surplus in the year ending.
Mr. Martin's budget slowed the speed at which the country was approaching the debt wall, but the turnaround is not yet in sight. Reducing the deficit in a significant way will require deep cuts across the board. This "cuts" may reflect themselves as user fees (which promote a more judicious use of what otherwise may seem to be "free" services), higher tuition fees for post-secondary students (most likely to be accompanied by a student loan package, so as to maintain an educated workforce), reductions in subsidies to industries and agriculture, significant lay offs of government employees, and lastly cuts in benefits such as social security and old age pensions (most likely by increasing the age of retirement and reducing the amounts made available for well to do retirees).
As somebody who has had the bad luck to traverse the road towards the debt wall (and hit it) twice, let me tell you that the landscape lucks frightfully familiar. The oncoming Ontario election gives us the opportunity to change course.