Reading government debt

The Montreal Economic Institute (MEI) released a statement yesterday alarming us all to the fact that around 7PM today, Québec’s public debt surpassed $280 billion dollars.  As if that figure wasn’t staggering enough – and literally incomprehensible to most of us – the MEI’s statement was quick to add that public debt is also growing to the tune of about $8 billion per year.

These types of “debt clock” statements are commonly presented with all the doom-and-gloom one can milk out of them, playing into people’s fears of crushing debt, unbearable tax burdens, government bankruptcy, and Greece-style social upheaval.  In a trick reminiscent of used car salesmen, the $280 billion dollar figure is divided into a “per person” amount ($33,629).  To add insult to injury, the MEI even provides a “per income tax payer” amount ($69,274), smugly implying that those who pay no income tax provide nothing of value to our economy and therefore to our society.  I’ll leave the critique of these tactics to others.

Debt services us

Rather, it’s worthwhile to take a more critical read at some of the MEI’s other assertions.  Choice among these is the implication that the $10.4 billion paid to servicing the debt is subtracted from money that could go to improving schools, hospitals, and other social services.  While this is strictly speaking true, that debt is what allowed us to build our schools, hospitals, and other social services in the first place – and these are services that make us all richer and drive the economy forward.  Without that debt, we might not have these schools, hospitals, and social services in the first place, and we’d be deprived of the clear economic benefits they bring that are almost certainly worth more than they cost in debt servicing.  To use a simplified analogy, it’s as if the MEI was saying you’d have more money if you didn’t have monthly mortgage payments.  That’s true, but tell me, would you really be better off without a roof over your head?

By their own numbers, the $10.4 billion we pay to service the debt represents a cost of about 3.7% per year.  Meanwhile, Québec stock market index funds (a decent approximation of Québec’s economic activity) have grown by about 6% over the last year and are performing at about 9% this year… which means more tax income to the Québec government in roughly the same proportions.  If the government is borrowing at 3.7% and yielding 6% to 9% returns, it would be stupid not to borrow.

Buy low, sell high

Our only saving grace, says the MEI, is the historically low interest rate.  But “everyone knows” that low rates can’t last forever, they say, which they present as an argument to pay off the debt now.  Why we should scramble to pay off our loans at a time when the cost having these loans is the lowest it has been in decades is left unexplained, but frankly baffles the mind.  The rule of buy low, sell high applies here (something one would also think “everyone knows”) – buy debt when the cost is low, and if you can use that money to invest in economic growth, you’ll have the money you need to pay it off when the cost of having it does inevitably increase.

This isn’t meant to be a blind defense of government spending – it’s not.  The state of our public finances is an issue to which we should all pay attention, and watchdogs like the Montreal Economic Institute have a vital role to play in doing so.  However, don’t be too quick to rush to panic at the sight of huge numbers, whizzing debt clocks, and the prospect of owing money.  Debt isn’t always a bad thing, especially when it fuels growth.

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