The Theory of Everything Debt
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The sky is not falling: a less pessimistic view of government debt “There’s an old saying, ‘Government debt doesn’t matter until it matters,’” says Douglas Porter, chief economist at BMO Financial Group. “I don’t view it as a negative to build a bit of debt, particularly if you have a growing population and you’re borrowing now to invest in roads, schools and hospitals. But you have to be careful.” Greece, we’re talking to you.
A word on deficits and debt securities FEDERAL, PROVINCIAL and municipal governments create budget deficits whenever they spend more money than they bring in through income- generating schemes such as taxes. To make this work, governments can issue debt securities to acquire the cash they need. For example, the federal government can issue short-term paper, treasury bills and longer-term bonds in the form of Canada Savings Bonds purchased by Canadians, and Government of Canada Bonds purchased by foreign investors. These are typically issued in $1 billion to $2 billion increments. Roughly 25% of Ottawa’s debt is owed to foreign investors; the rest is owned by Canadians. Provincial governments and larger cities such as Toronto and Montreal can also issue bonds. Debt securities represent about 70% of the total liabilities for the federal, provincial and territorial governments.
A little current trivia While we’re used to seeing bonds ranging anywhere from one year to 30 years, Mexico has issued a bond that doesn’t mature for a full century, making the most of what is perhaps a once-in-a-generation opportunity to lock in cheap funding for a very long period of time.
Lever of opportunity or coping mechanism? WHILE THERE IS NOTHING INHERENTLY RIGHT OR WRONG ABOUT BORROWING, financial experts often distinguish between “good debt” and “bad debt.” • GOOD DEBT is an investment in something that creates value or produces more wealth in the long run. Examples include a mortgage on a home, a student loan to pursue education for a career, a loan to launch a business or to purchase capital equipment. • BAD DEBT, says Natasha Nystrom of the Financial Consumer Agency of Canada (FCAC), is debt taken on to buy something that immediately goes down in value or to buy something that you can’t repay on time and in full, thus incurring interest charges and more debt. Examples include charges on a store credit card at a high rate of interest, a personal loan to pay monthly expenses or anything you don’t need or that is not useful.
That said, the FCAC urges consumers to keep in mind that a debt may be good or bad depending on the circumstances. For example, a mortgage is usually considered a good debt because it’s an investment in property that is expected to increase in value — but it could be a bad debt if you can’t afford the payments. Hello, subprime mortgage crisis that brought down world financial markets.
36 | CPA MAGAZINE | MAY 2015
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