Which of the following statements about the Canadian federal government's finances are true:
The government should live within its means. If I ran my household the way the government runs its finances, I'd be broke and so will our country be if we don't stop overspending.
Our tax dollars pay for government spending. If we don't pay taxes, the government can't spend, because it has no money of its own.
The government's debt is borrowing from future generations, and it is an obligation future generations will have to repay down the road.
Government deficits crowd out private investment. Buying government bonds means there is less money to invest in other things.
If you have read Modern Monetary Theory (MMT) economist Stephanie Kelton's excellent book The Deficit Myth, you'd know this is a trick question, because all of these are false. But you've surely heard all of these points mentioned somewhere along the line. Government debt and deficits are a great way to scare the hell out of people - huge numbers, difficult concepts, economic jargon. But the reality is, it's just not that complicated or scary.
The above statements all at least in part reflect the old system whereby paper currencies were backed by gold reserves. But countries that have currency sovereignty have operated under different rules since the US - and thereby the rest of the world - chucked the gold standard in 1971. There are three conditions for currency sovereignty: that the national currency is not pegged to any other currency, that taxes are paid in that currency and that the government issues debt only in its own currency. Canada meets all three of these (there is a small amount of bonds denominated in USD, but they are immaterial).
Government finances are still framed as if they had the same limitations as household finances, which is ludicrous. You get a job, buy a house with a mortgage, raise children, pay off the mortgage, save for retirement, retire and eventually die, presumably with some money left over to leave your kids. The government does none of these things. Most importantly, it can print its own money, which is not at all something you should attempt. The ability to print money means the federal government can't ever go broke.
When you pay your taxes, Trudeau doesn’t send an intern to the TD branch and ask for your money so they can build a bridge. The bank simply debits your account and credits the government’s, which automatically decreases TD's reserves with the Bank of Canada. The proper way to think about taxes is that they are a withdrawal of money from the system. When the dollar began circulating in 1858, how did citizens get it into their hands? The answer is that the government had to spend the dollar into existence in the first place, otherwise no one would have had any dollars. (The income tax wasn't introduced in Canada until WWI.) Taxes are essentially a tool to incentivize certain behaviors (so-called sin taxes discourage consumption of harmful products like cigarettes) or attain specific outcomes (a progressive income tax reduces inequality).
There is no actual federal government debt in the sense that you and I have debt. The federal government's accumulated debt is simply the historical record of all the dollars the government has issued, and government bonds are simply interest-bearing dollars. So there is actually nothing to pay back. Has Britain paid back its war debts? In a word, no. If the government wanted to get rid of the bonds, they could simply exchange them for dollars and this could be done by the BOC with a few keystrokes. And it would actually be deflationary, because gross income would fall as holders would no longer collect interest.
The crowding-out theory has been used by fiscal hawks for decades, even though there has never been much evidence to support it. Kelton debunks it easily by showing that when the government is in deficit, the private sector is in surplus and vice versa. Here is a simplified example from her book: the government spends 100 bucks into the economy but only collects 90 in taxes, leaving it with a deficit of 10. But the private sector now has a surplus of 10. So if that 10 bucks is used to buy government bonds it is “extra money” and doesn’t impact the amount of funds available for private investment.
MMT's specific policy recommendations are much more theoretical and therefore debatable. But its assertions as to how government finances actually function have not been challenged in any meaningful way and moreover, they are backed up by real world events. For example, Japan has been running large deficits non-stop since the early 1990s, and its total "debt" now stands at 240 percent of GDP. If the above four statements were true, Japan would have already collapsed into a morass of hyperinflation, destitution and chaos. Last I checked, it had not.
Here in Canada, we will probably hear a lot of moaning in the coming months about the huge deficit the government has racked up during the pandemic. Some politicians will no doubt use it to try to scare voters with predictions of high inflation and huge tax increases. Remember that the exact same things were said after the 2008 financial crisis bailout and neither happened. The deficits are much larger this time and there is a real limit to how much the government can spend. But even if we were to push close to those boundaries, our government won't go broke and we won't descend into economic collapse. There are no deficit monsters hiding under our beds.
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