Ottawa's cup runneth over
Federal budget surpluses FAQs
CBC News Online | October 13, 2004
What's a surplus?
If you set aside $20,000 to buy a car but find one for $18,000, you've got $2,000 left over. That's a surplus. Maybe you can pay your car insurance bill in one shot, instead of $160 a month, like you planned. You can now set aside that $160 a month you planned to spend on insurance perhaps to set up a "rainy day fund."
It's similar for governments. Every year, the finance minister gets up in the House of Commons and tables his budget the government's spending plans for the year. Finance ministers tend to keep their estimates fairly conservative. For instance, for the fiscal year 2001/02, the government originally estimated a surplus of $1.5 billion. By the time all the tallying was done, the actual surplus was $8.9 billion.
On March 23, 2004, Finance Minister Ralph Goodale predicted that for the fiscal year that ended March 31, 2004, the government would have $1.9 billion left over after all its bills were paid. On Oct. 13, 2004, Goodale announced that tax revenues were higher than expected and the actual surplus was $9.1 billion almost five times what he budgeted for.
Finance Minister Ralph Goodale
Do governments always run surpluses?
No. But the federal government has been in the black for seven years in a row. The accumulated surplus over that time has been more than $60 billion. The actual surpluses for the past seven years have been:
- 2003/04 $9.1B
- 2002/03 $7B
- 2001/02 $8.9B
- 2000/01 $18.1B
- 1999/00 $12.7B
- 1998/99 $3.1B
- 1997/98 $3.8B
Before 1997, the government had run surpluses only twice in the previous 36 years. The other 34 years, Ottawa consistently spent more money than it took in. You spend more than you take in and you're running a deficit. Consistently running deficits means that you're accumulating a lot of debt buying now and promising to somehow pay later. Keep doing that, and there won't be much you can buy later because you're stuck paying for previous years' purchases plus interest.
What does the government do with its surpluses?
It pays down its debt. Since the debt peaked at $562.8 billion in 1996/97, the government has slapped down $61.4 billion on its accumulated debt. As of Oct. 13, 2004, that debt officially stood at just over $501 billion.
If Ottawa's taking in more than it needs, why doesn't it just send us all refunds?
We're getting into politics here.
There is a school of thought that argues that the government should only take from the taxpayer what it needs to pay its bills for the year. After all, when you file your taxes for the year, Ottawa sends you a refund if after all your credits and eligible expenses you've paid more tax than you were supposed to.
If the government refunded the 2003/04 surplus, it would mean that every man, woman and child in the country would receive a cheque for about $250.
On the other hand, by using the money to pay down the debt, it's paying for some of those programs it borrowed money to run a couple of decades ago.
What are the advantages of paying down the debt?
You free up more money for other expenditures. In reducing the debt by more than $60 billion, the government is spending $3 billion less in interest payments every year. That pleases the people who run money markets. It shows them that the debt while still high appears to be under control. That shows Canada is a good credit risk, which takes some pressure off interest rates.
The federal government has committed itself to reducing the country's debt. When the debt peaked, it was equal to 68.4 per cent of Gross Domestic Product or the total of all the goods and services produced by the economy. In the mid-1970s, the debt to GDP ratio was closer to 25 per cent. The government's goal is to get back to that number by 2015.
The debt to GDP ratio as of October 2004 sits at 41.1 per cent.
Hitting the goal will mean that debt-servicing costs will absorb a smaller share of government revenues, freeing up resources to address the rising costs of programs on which an aging population will depend.
What's the difference between paying down the debt and debt-servicing charges?
You don't necessarily have to pay down the debt. For instance, if you go to the bank and take out a line of credit secured by the equity in your home, the bank will probably let you make payments that cover only the interest. As long as you have the equity and can make the payments, you don't have to pay down the debt. But if you want to use that line of credit to invest in mutual funds or in slot machines, you'd better increase your payments to get rid of some of the debt.
It's similar with Ottawa. In the years the government spent more than it collected in taxes, it had to borrow money by selling Canada Savings Bonds, Government of Canada bonds and Treasury bills on the credit markets.
When the federal government's debt peaked, it had to spend almost 38 cents out of every dollar it collected in taxes just to pay the interest it promised to pay the people and institutions that trusted Ottawa enough to invest their hard-earned money in all those bonds. That left only 62 cents out of every tax dollar collected to pay for programs like health care, transportation, Old Age Security, defence and transfers to the provinces.
In 2003, federal debt-servicing charges consumed 21 cents of every dollar of revenue. Thirty years ago, it was 11 cents.
You can do a lot more if you have 89 per cent of your income left after you pay your bills than you can with 62 per cent.
How is Canada faring compared to other industrialized countries?
Overall, fairly well. No other G-7 country has run seven consecutive surpluses. Canada is the only G-7 member to run a surplus in 2004.
The United States has gone from substantial surpluses four years ago to a record deficit of $455 billion this year.
Among G-7 countries, Canada's debt burden moved from second-highest in the mid-1990s to second-lowest in 2003. The Organization for Economic Co-operation and Development predicts Canada's debt burden will soon be the lowest among G-7 nations.