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Jay Currie

One Damn Thing After Another


The Federal Debt

Ian Welsh at Tilting at Windmills has some revealing charts up detailing the rise and fall (well, sort of) of the Canadian Federal Debt. As most people know, the debt started to fall when the Liberals began to run surpluses in 1998.

What is missing from these very useful graphs are two other key numbers: the inflation rate and the bank rate.

A good deal of the reason why the national debt began to decline lies in the Conservative Government's decision in the late 1980's and early 1990's that beating inflation was to be the government's top priority. Combined with the Bank of Canada's willingness to use interest rates to reduce inflationary pressure, inflation came under control in the mid 1990's.

The effect on the debt numbers is significant. First, many of the government's transfer payments to both individuals and provinces were indexed to CPI. And, of course, simply keeping the federal government operating meant, during periods of high inflation, increasing operating funds to at least match inflation.

As well, as the government is in the financial markets selling bonds to finance the debt, interest rate rises increase the cost of debt service.

Arguably, the surpluses achieved under the most recent Liberal governments reflected very little more than the radical reduction of inflation and the concurrent reduction in the government's cost of borrowing.

Little wonder Martin is wary of running on his record as a deficit buster.

[cross posted at Shotgun]