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THE INVITATION
Wednesday Night Salon # 941
As we analyse the details of the Québec budget this Wednesday, let us ponder the thought:
"The difference between the magician's act and the Finance Minister's
is that for the former we watch how the rabbit gets pulled out of the
hat, whereas with the Minister we wonder how the rabbit got in". (Profesor Tony Deutsch)
Man - and for that matter, Woman - does not live by the budget alone, however, therefore there will indeed be other topics, including last weekend's meeting of municipally-inclined minds.
We ask you to think about DEBT - can we (the World) afford DEBT, how much DEBT can we afford and why? In line with this, let us also reflect on the proposals to reform the IMF.
BERKSHIRE H
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Washington Tuesday, March 14, 2000
This should certainly be a fascinating session. Only sorry that Terry and I
are in LA for a family visit and not in Montreal. It would certainly be a
session that the congen should attend. We have followed some of the budget
numbers (although the federal budget more intensely than the provincial
budget). Happily the U.S. and Canada continue to benefit from an economy
that is generating so much tax surplus that people are arguing over the
benefits of wealth rather than the privations of poverty. So the main
argument is over how to keep the party going while wondering whether the
"what goes up, must come down" analysts are right: or when they will be
right?
I guess personally we are still stuck in "household economics" to the extent
that we would prefer a faster paydown of debt than either new spending or
even tax reduction. I do, however, tire of those who complain that any tax
reduction "benefits the rich" without the same analysts noting the proportion
of taxes that are paid by those same "rich". We wish that we felt as rich as
they say that we are. Currently the U.S. seems to be doing more in the "pay
down the debt" than Canada, but largely because our divided government can't
decide what to do and hence the surplus goes automatically into debt
reduction. One of the few instances when deadlocked government can be a
virtue! And it may well be the same result throughout this year as both Reps
and Demos struggle to find issues for the campaign.
David and Terry Jones
Wednesday Night in Westmount #941
15th March 2000
INTRODUCTIONS
Diana Thébaud started the evening by introducing Sonia Singh from Air India and pointing out that tonight we had three students in the Concordia MBA in Aviation program who come from three different continents. Joining Sonia were returnees, René from Venezuela and David from Kenya - a good measure of how international this programme and our city's universities are.
DEBT
The question on the table: Is debt good?
CANADA
Debt is a drag on the economy. According to the budget, the Federal debt stands at $576 billion, although it could be assessed at $560 billion if some offsetting assets are included. But the real number is much bigger if we include all!
To get the complete picture, the federal, provincial debt should be combined as the feds can print money but the provinces cannot. Ottawa won't print money however, says our central banker, as this would be inflationary. If the debt is consolidated, as is done in France and Italy, then Canada rates as the fifth worst among 45 countries measured on a debt to GDP ratio. Servicing this Debt cost over $45b a year ...many times the cost of Medi Care
Canada was at 60% indebtedness, and is planning to move to 50%. Paying off the debt may drive interest rates down, which in the long run may be good for social programs (students and entrepreneurs could borrow more cheaply.
QUEBEC
Québec has balanced its books this year and now has a surplus of some $2 billion, however, the provincial debt stands at $100.2 billion and currently at 48% debt/GDP. And that doesn't count the $38 billion debt owed by Hydro Québec. The Parti Québecois has no intention of paying the debt down although there is now Québec legislation forcing the hospitals to balance their budgets and pay down their loans. Would a reduced debt not be a " winning condition" for Québec - making it a stronger economic entity?
We should not forget that there are totally different perspectives in Ottawa and Québec. The Federal government is based on the principle of sound fiscal management. However, Article 1 of the PQ Party Policy fixes separation as the ultimate goal. Bernard Landry is out to buy votes, and to him and most of the Québec public - debt does not matter. What does concern them is being the most highly taxed province in North America, while the health care and other services are poor.
In this connection comments were made on the $825 million sitting in a Toronto bank account, which should be spent on health care. This is good fiscal management? Talk about "washing one's dirty Landry in public!"
THE U.S.
The first US Secretary of the Treasury, Alexander Hamilton, maintained that a federal debt if well managed could be a blessing. But, paying down debt completely would eliminate the need for Treasury Bonds a reliable investment for both citizens and foreigners.
In the States, government programs financed by government debt are used to stimulate the economy; currently the economy doesn't require stimulation, so the plan is to pay off most of the debt with a target of 25% debt/GDP.
Diana read a message from Terry and David Jones , formerly of the US Embassy in Ottawa, who favor faster pay down of the debt rather than new spending or tax reduction and point out that the US is doing better than Canada in this because "our divided government can't decide what to do and hence the surplus goes automatically into debt reduction. One of the few instances when deadlocked government can be a virtue".
WHAT IS THE SOLUTION?
"Debt and debt reduction has no constituency". How do you go about selling debt reduction?
Planning how to handle the debt and its repayment is an important tool in managing the economy. Our Swiss banker maintains that reducing debt to zero makes no sense. He recommends paying down some of the debt, and investing in infrastructures with 30-50 years such as roads. The next generation can thus participate in the cost of creation and maintenance of these infrastructure facilities.
In times of inflation having a large debt is less important, as the value of the debt will decrease relative to people's earning power.
Debt is costly to a country and has a net effect of reducing people's disposable income. At present 26 cents of every Canadian tax dollar collected goes to service the interest on the national debt. If the debt were paid off, these 26 cents per tax dollar could be returned to the taxpayers, or else invested in social programs, like education. [over $45b a year]
The Bank of Canada estimates there will be $100 billion surplus available over the next five years. Our central banker reiterated his previous recommendation that one third be used for debt reduction, one third for tax reduction and one third for social programs.
Guy Stanley pointed to the case of BC and the image of WAC Bennett putting a torch to a pile of debt notes. He thought that if there were no debt there would be no need for a central bank! Our central banker was appalled!
Another comment concerned the western provinces that have managed to cut the debt and improve their situation. The same model should be used at the federal level to achieve a major reduction in the debt - but not down to zero.
Tony Deutsch opined that the federal financial assumptions are on the conservative side and the overall economy may well do better than predicted. However, at the provincial level, assumptions are over-optimistic and there well may be problems in a couple of year's time. There could be a snap election, as the PQ will argue there is a surplus, and they have turned the economy around. The employment growth figures are the best in 28 years, with 75,000 jobs created last year in Québec. GDP is at 3.3% here and 4.0% in the US. Housing starts are up to 50,000 units. The PQ in any election would use all the good economic news as ammunition.
HIGHER EDUCATION AND GOVERNMENT FUNDING
The universities are a regulated industry (especially here in Québec), and there are no incentives to optimize the operation. Fees should be deregulated, as has been done in some Ontario University programs.
The newly announced funding will help, but is not sufficient. The investment of approximately $1 billion is over 5 years, starting with $100 million in year 1, $120 million in year 2, $180 million in year 3 and $300 in year 4. For universities like McGill, this translates into too little, too late. McGill will have a small deficit of $26.5 million, but it has over $200 million in deferred maintenance, and needs funding for some 100 new professors over the next 2 years. All universities are looking for ways to raise the fees to cover the costs. At present the provincial government cuts their subsidy if Québec universities raise their fees. Concordia and McGill have been looking at ways around this situation by offering courses out of province, where they can charge the full fees. For an MBA, the fees should be at least 25,000 USD per year. McGill has such an MBA program in Japan. Students who have graduated from this program or the Concordia MBA in Aviation are being snapped up for annual salaries around the $100,000 mark. [This only true in a few cases .. most leave bankrupt!]
THE MARKET
Despite a volatile week on the stock markets, the DOW is down 15% from its high, the NASDAQ is up some 30%
DOWNLOADING
The court decision on the challenge by the City of Westmount to the $322 million downloading should come in about 2 months. What appears to be happening is the removal of municipal revenue on a permanent basis, offset by a one-time handout OF $170 million (whereas Landry promised $430 million) for all municipalities. This is part of Landry's plan to improve the economy and lower unemployment as part of creating the "winning conditions".
INDIA
Sonia commented that in India there is central control, while agricultural management is delegated to the individual Indian states. In India consultation does take place regarding budgets preparation, but only with industry.
India will be overtaking China in population in the next couple of years. The BJP government may be moving to make India more religious. 88% are Hindu, but there is a great diversity of other ethnic groups. In the Indian provincial states there is more a feudal system of government.
THE FEDERAL SCENE
Stockwell Day appears to be a loose cannon and with his policies on a flat tax and hard-line on gays and abortion.
Perhaps Jean Chrétien should run again, to ensure that there is a francophone PM to deal with any referendum in Québec. However, the $1 billion scandal in the Human Resource department may come to haunt him. The RCMP may well be looking into how some of the money was spent in his riding. Pierre Pettigrew was really in charge at the time the funds were authorized and he should be taking the heat on this issue. In most government departments there is little or poor documentation. In Indian Affairs - $4.5 billion has been mismanaged.
Nevertheless Chrétien will most likely run again, as he wants to go into the record books as being the first PM to serve for three consecutive terms. Pierre Trudeau still has a strong influence, and may be involved in some of the backroom decisions.
IMMIGRATION
Charles Taylor has just given a speech on the duality of Canada. No other country has a special status for immigrants coming to one province, like Québec, as compared with the rest of the country. There are two different environments and two different immigration systems. But Canada is not alone in this situation - in Switzerland the individual cantons, and even down to the village level may have a say about immigrants.
Toronto is now rated the most multicultural city in the world. Among the biggest donors are the Indian population in Toronto, who send large amounts of money to their relatives back home.
Notes by Gerald Ratzer
Edited by Diana Thébaud
Try a small test also try
A movie of the Cirque du Soleil you select; all 6 clips are fun.
See our file on Gun Control
David presented Rex Murphy on "Who wants to be a millionaire". It was vintage Rex Murphy, clever, articulate and funny. For many, the weekly Rex Murphy clip is as good as "Yes, Minister".
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