What is government debt and why should you care if it’s increasing?
DIRECT GOVERNMENT DEBT IS MONEY OWED now, for example to pay for day-to-day expenses such as salaries and supplies and to pay for contracted infrastructure projects. Over the past six or seven years, governments across Canada have been increasing their debt. In fact, net government debt in Canada has ballooned from $823 billion in 2007/08 to more than $1.2 trillion in 2013/14, or $34,905 per capita, according to research from think-tank the Fraser Institute. “This is a worrying trend driven in part by budgetary deficits [governments spending more than the revenues they bring in] and how they are financing capital projects,” says Charles Lammam, director of fiscal studies at the Fraser Institute. For example, the growth in Ontario’s net debt is primarily driven by budget operating deficits or borrowing to fund current-day spending, while recent increases in the government of BC’s net debt are the result of borrowing to pay for capital infrastructure projects
that will benefit future generations. It’s the difference between borrowing to pay for the groceries and borrowing to pay the mortgage. “Governments, like families, have to pay interest on the money they borrow. That has consequences. Today 11¢ of every dollar the federal government collects goes to interest payments. If government debt continues to increase, there is the risk of more money going to interest payments and less to programs such as healthcare, education and social services. It could also lead to credit agencies downgrading governments, making investors nervous and thereby increasing the cost of borrowing, which in turn could lead to a hike in taxes during a soſt period in the economy and more borrowing — a vicious cycle.” All of this happened in Canada in the 1990s, by the way. We fought that battle and brought down those deficits, giving us a leg up on other countries.
Business Debt $1,611,810,000: value of corporate loans Q4 (2014)
THERE ARE A VARIETY OF WAYS CANADIAN BUSINESSES CAN ACCESS DEBT: asset-based loans, lines of credit, mortgages, angel investment, venture capital, corporate bonds, debentures, short-term commercial paper, common shares and preferred shares. However, Canadian businesses are fairly risk averse, which is good from a sustain- ability standpoint but doesn’t bode well for moving into new markets or developing new products.
Is debt necessary for modern capitalism to work? “Yes. But that doesn’t mean every business has to use it,” says Ted Mallett, vice- president and chief economist at the Canadian Federation of Independent Business, which represents 109,000 small and medium-sized businesses across the country. “Only two-thirds of our members have a major loan, either from a financial institution or other sources. The rest are self-financing. They’ve developed their reserves so they can operate without the help of revolving lines of credit or loans. These businesses are stable and likely aren’t in high-growth mode; for those that are, debt is important. We need lenders that know how to lend to these businesses — we’ve been critical in the past, pointing out that lending is more tied to the asset as opposed to what the strategic potentials are.”
MAY 2015 | CPA MAGAZINE | 37
What’s the difference between credit and debt? The terms are used interchangeably and for most people describe the same thing, but if you’re getting picky, credit is the ability to borrow money and debt is the money you owe
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