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THE FALSE
SURPLUSES OF PAUL MARTIN
By :Andre
Gouslisty
Former
Professor of Economics
Faculty of
Administration
Sherbrooke University
September 9
2002
To have
transformed, at first sight, and we insist on the words " at first sight
", a series of budget deficits in a series of surpluses as the first two
columns of the table below show it
Position of
the Canadian government in million $
Source: Bank of Canada Banking and financial
statistics - August 2002
the former
Canadian Minister of Finance Paul Martin, is taken as a finance genius, almost
Nobelisable and a statesman, to which the governance of Canada should return
without discussion.
It is in
any case what Thomas J. Courchesne of Queen University and researcher
affiliated to the Institute of Research in Public Policy (IRPP), makes it
clear, in a study entitled " Half-Way Home: Canada's Tax Remarkable
Turnaround and the Paul Martin Legacy ", dated July 2002.
Unfortunately
for everyone, all the surpluses of Paul Martin are only illusions, not to say
bluffs straightforwardly, because they had to be necessarily financed by the
Central Bank in the form of purchases of bonds which are an expenditure and by
refundings of the debt, which are also
expenditure. The destiny of the State, its essence,
is to have deficits contrary to the destiny of the private enterprise, its
essence, which is to have profits.
The State,
it is the Treasury + the Central Bank. The Treasury, it is the right pocket of
the State and the Central Bank the left pocket. When the right pocket filled
thanks to the exits of the left pocket, one cannot say that there is surplus.
The Central
Bank injects liquidities, in the overnight money market by buying bonds and by
increasing its assets or, on the contrary, sponge, absorbs liquidities, by
selling bonds and
In the
preceding table, years 1999 and 2000 are typical years because, in 1999, the
refunding of the debt is almost null and, in year 2000, there was a very strong
refunding of the debt. In 1999,
the budgetary surpluses absorb liquidities and this absorption not having been
compensated by refunding of the debt, the Central Bank injects liquidities to
compensate for the bad effects of the surpluses on the liquidities. In year 2000, the budgetary surpluses
absorb 17,7 billion liquidities, but as this absorption is more than
compensated by an injection of 18,4 billion by way of refunding the debt, the
Central Bank, vis-à-vis this surplus of liquidities, is forced to still absorb
liquidities for 3,5 billion $ by selling securities and by decreasing its
assets. As it is seen, the
budgetary surpluses have bad effects on the liquidities by decreasing
them. On the other hand, refunding
of the debt, an expenditure of the government and the purchases of bonds by the Bank of Canada, an another
expenditure of the State, have on the liquidities good effects by increasing
them.
We propose,
in the lines which follow, to show how the payment of the taxes and the
budgetary surpluses by the taxpayers reduces the reserves of the banks and how
the reduction of the reserves of the banks obliges the Central Bank to
intervene and buy bonds to maintain the interest rate at the best level .
We propose,
to show also, that the criteria, in virtue of which the valuation of the financial management of the former
Canadian Minister for Finance Mr. Paul Martin, was made, namely the following
ratios of Maastricht : Debt / GDP = or < that 60 % and the Deficit / GDP =
or <
1. Every time a bank receives 1 $ in
deposit it puts a certain percentage in reserve and with the remainder made loans and/or buys securities.
2. The reserve can be legal or
voluntary. It is, in both cases, a
rule of good management which makes it possible to the bank to face the
withdrawals of funds.
3. Each time that there is withdrawal of
funds, the bank draws from its reserves to refund the customer.
4. If the rate of the reserves is for
example 10 %, a bank loses the totality of its reserves each time its deposits
drop by 10 % and must reconstitute them, if not entirely, at least in large
part.
Let us
suppose that a bank has at the starting point the following simplified balance
sheet:
When the
bank faces a withdrawal of 10 billion $ of the depositors the preceding balance
sheet becomes:
The
withdrawal of 10 billion $ made the reserves to fall to 0 and the bank must
reconstitute the reserves necessary
for deposits of 90 billion $. The bank must find 9 billion $ if the rate
of the reserves is 10 %.
The bank to
reconstitute its reserves has four options.
a) To
borrow from other banks in the overnight money market in Canada or in the
market of the fed funds in the United States. The balance sheet of the bank becomes:
b) To sell securities and the balance
sheet becomes:
c) To
borrow from the Central Bank and the balance sheet becomes:
d)To reduce
the loans and the balance sheet becomes:
Each option
has its advantages and its disadvantages but, it is generally to the first
option that the banks have recourse, i.e. to get funds in the overnight money
market .
5) Each
time there is a reduction of a deposit:
- to refund a loan;
- to cash banknotes;
- to pay taxes;
there is a
loss of reserve for the concerning banks. The demand in the overnight money
market
or the fed
funds becoming stronger and higher than the offer, the interest rate on this
market increases.
6. To prevent an increase of the interest
rate in the overnight money market or, in the fed funds market, the Central
Bank must intervene and inject liquidities by its purchases of governmental
securities.
7. As the banks and the public cannot
eternally sell securities of the government at the Central Bank it is
understood that this source of securities can be possibly dried up.
8. So that the public can pay the taxes
and the budgetary surpluses it is absolutely necessary that the Central Bank
injects monetary liquidities.
9. One is then in the presence of a
juggling act. While the Treasury
has surpluses, the Central Bank has deficit. It is because the purchases of bonds of the government, of
private securities, of foreign currencies by the Central Bank, are not counted
like a government expenditure that
budgetary surpluses are possible.
10. The surpluses of the government are not
bearable because no one sees how the Central Bank can perpetually buy
securities from the public and banks without this source of securities drying
up, and if it is not fed by sales of securities by the State which is
impossible with
surpluses,
but possible with borrowing and deficits.
11. Many people presents the refunding of
the governmental debt like one of the most virtuous acts of the former Minister
of Finance Martin. But a virtue is
a virtue if it is free act and is not forced act. When one is constrained to be virtuous one is not virtuous
at all. The refunding of the debt was a necessity. The State, because of its surpluses, spending less, must
necessarily spend differently by refunding the debt. The refunding of the debt has, on the reserves of the banks,
the contrary effects to those of the payment of the taxes, by increasing them. The refunding of the debt, an
expenditure, reconstitutes the reserves of the banks and relieves the Central
Bank of the burden to reconstitute them itself. When the governor of the Central Bank applauded the
refunding of the debt it is because this refunding will allow him to reduce its
purchases of securities in the open market.
12. Many people sought to appreciate the
management of the Minister of Finance Martin by means of two ratios created by
the experts behind of the Maastricht treaty, February 1992, instituting the
European Union, namely: - the
ratio Debt / GDP = or smaller than 60 %; - the
ratio
Deficit / GDP = or smaller than 3 %. M. Martin would have beat these records, by reducing the debt to 50 %
of the GDP while eliminating purely and simply the deficit to replace
it by
surpluses.
However,
these two ratios are of a total irrationality, without any financial
value. They constitute whimsical
inventions and without the least utility, of the so-called experts of
Maastricht.
13. The ratio Debt / Income is a ratio
which does not exist in the financial literature. It is an invention of the experts of Maastricht. What one finds in the financial literature,
it is the
ratio Debt
/ Assets which indicates the share of the funds borrowed in the formation of
the assets. When one is in the
presence of a debt, the significant thing
to know, is not if the debt accounts for 60 % or 600% of the income,
because that is of no utility to know that, but if the income can ensure the
debt servicing i.e. the payment of the interests and the refunding of the
borrowed capital. Financial
Sciences attach for this reason a great importance to the ratio
Debt
servicing / Income. The banks for example when they lend to households or
companies ensure that the ratio Debt servicing / Income does not exceed 35 % of
the gross income of the borrower.
14. The ratios Debt / GDP and Deficit / GDP
connect the governmental debt and the governmental deficit with the National
Income and not with the governmental income. However the National income, it is a thing and the
governmental income, another thing.
To say that the governmental deficit should not exceed 3 % of the GDP,
it is as to say that the deficit of Microsoft should not exceed the income of
General Motors. It is difficult to swallow that.
15. The second ratio of Maastricht, namely
that the deficit of the government should not exceed 3 % of the GDP, is even
more irrational, from the financial point of view, than the first ratio.
a) To say that the deficit of the State
should not exceed 3 % of the GDP
signify, that the deficit should not exceed a fixed amount equal to 3 %
of the GDP.
b) If, in the mind of the experts of
Maastricht, the State must be managed like a private enterprise, which
qualifies any head of company for the post of Minister for Finance, i.e., to
have receipts which exceed the expenditure, to fix, at precise amount, the
losses, is against the essence of the enterprise which should make only
profits, in the absence of what, its very existence is threatened
c) If, in
the mind of the experts of Maastricht, the State must be managed like a unique
and original institution, which has the immense power to define the currency,
to give it legal tender and to emit it, as well as the immense power to give to
the money a value by taxing, and which consequently does not need to borrow to
spend, in this case, the budget deficit plays an important role in the saving of the public. In this case, the experts of Maastricht
badly understood the following equation:
Annual saving = Investment + Deficit + Foreign trade surplus and did not
understand that the deficit of the government does not have to be, at the
maximum, equal to 3 % of the GDP but can and must be such as it provides to the
public the currency (non productive of interest) and the bonds (productive of
interest) which it needs and desire.
16. If it is not forbidden to invent
whimsical ratios, like the experts of Maastricht do it, it is not prohibited to
suspect either. The suspicion is the starting point of scientific
research and the
starting
point of the criminal police investigation. We suspect the experts of Maastricht of having wanted, by
their ratios, apparently financial, to limit the size of the State, in the hope
to see it, transferring to profiteers, qualified wrongfully private sector,
assets, generally for a bread mouthful.
A minister like Paul Martin and a government, who would respect and
which by zeal would exceed the Maastricht ratios, would give pledges of
goodwill to the business community
that they
intend to enrich this community by
selling to it, generally at cheap price, the assets the State holds, not in
proper, but on behalf of the citizens.
The size of the State, which can be measured by the value of its assets,
would not be any more a rational question, but an ideological question. The
State should hold only the assets which the businesses community does not wish
to hold. That too, is difficult to swallow.
In the
private sector, at the level of the enterprise, the surplus of the receipts on
the expenditure is called " profit ".
In the
public sector at the level of the government the same surplus of the receipts
on the expenditure is called " surplus ".
Whereas in
the enterprise the profit is a peremptory necessity, its absence putting in
danger the very existence of the company, the surplus, at the level of the
budget of the State, is an aberration and has a harmful effect because of the
equation: Saving = Investment + Budget deficit + Foreign
trade surplus.
If M. Paul Martin had carried out his
surpluses at the head of a company one could have qualified him a genius of
finance because it is very difficult to carry out profits. It is so difficult
that
certain businessmen have recourse to the cheating and the traffic of the
financial statements to carry out, on paper, the profits difficult to realize
on the ground.
At the head
of the ministry of finance Mr. Paul Martin did not understand that the public
finances must be managed not by a business man and with the principles specific
to the private enterprise, but by a statesman and according the principles and
knowledge specific to the field of the State.
The
statesman, in a modern State, is the man that knows and which never forgets
that the State has a big and unique capacity, that to define the money, to give
it legal tender and to create it.
The
statesman, in a modern State, is who which knows and never forgets:
- that the
State needs neither the taxes nor the loans to spend, but which knows that it
is the spending of the government which will provide to the public the means of
paying the taxes and to save in the form of currency and bonds
- that the
State = Treasury + Central Bank and that when the Central Bank buys securities
in the open market it is an expenditure which must be deduced from the
surpluses;
- that when
the Central Bank modifies the discount rate it is by no means necessary to send
to the governor great blows of hat of approval and to speak in praise of its
independence;
- that the
Central Bank has only one power, to fix the interest rate in the overnight
money market ;
- that the
rate of interest in the overnight money market must be such that the prime rate
of the banks is lower by at least 3 % than that of the growth rate of Gross
domestic product, GDP, expressed in currents $, and that the Central Bank must
ensure the following structure:
Growth rate of the GDP in currents $ - 3 % = Rate of the
prime rate - 3 % = Interest rate of the overnight funds.
- that
banks and the money lenders must have a comfortable profit margin, that is to
say a difference in at least 3 % between the rate of the overnight funds and
the prime rate, not only for the comfort of the banks, but so that they can, in
their turn, provide to the public (households, companies, local communities)
the services which the Canadian banks are not able to currently provide, like,
for example, a 30 years mortgage loans and at a fixed rate;
- that the
interests, all the interests of all the loans without exception, must be
deductible from the taxable income for all the taxpayers and this in the
interest of the economic activity;
- that the
taxes must normally be lower than the expenditure of the government because of
the desire of the public and the banks to hold reserves in legal money;
- that
households and the banks hold government bonds; that these bonds issued by the government are part of the
monetary policy of fixing of the interest rates in the overnight money
market; that they make it possible
to sponge the excessive reserves of the public; that they
allow the
Central Bank, by buying and
selling them, to fix the interest rate in the overnight money market at
the most suitable level for the economic activity;
- that the
government can and must generate deficits, until the moment when it provided to
the public, the currency (non productive of interest) and the bonds (productive
of interest) which it wishes to hold for its safety; that the Bush Administration, with a deficit envisaged of
157 billion $ for year 2002, shows a better comprehension of the monetary
mechanisms than the Clinton Administration or than Paul Martin with their
budget surpluses; that John
Manley, a
candidate for the succession of Jean Chrétien, who declares repeatedly that it
will continue the policy of the budget surpluses of Paul Martin but, without
Paul Martin, makes a
double
fault, a policy one and a financial one. The political fault being to want to
work like Paul Martin and in this case one does not need John Manley. The
financial fault being to want to continue a policy of budget surpluses which is
an error;
- that,
when the experts of Maastricht invite a statesman to respect the following
ratios: Debt / GDP = or < that
60 % and Deficit / GDP = or < that 3 %, he send them to stroll, showing by
that that he intends to give to the State the optimum size; that he does not
intend to manage
the State
for the only profit of the businessmen community but for the profit of the
Nation i.e. of the businessmen community and other communities, especially
after the recent financial scandals and the financial statements falsification
by certain businessmen;
- that
there are two categories of assets, the assets which one holds on a purely
individual basis, private basis and the public assets that one holds by the
channel of the State. The
importance
and the
volume of these last assets must be such as they maximize the well being of the
citizens and the communities forming the Nation and not depend on a ratio fixed
in advance and theoretically.
- that the
existence of an unemployment is a proof of the insufficiency of the budget
deficits.
The
statesman, in a modern state, it is that which knows and which never forgets
the following equation: Annual
saving = Investment + Budget deficit + Foreign trade surpluses;
In the
light of this last equation, one can say that the surpluses of the former
Canadian Minister of Finance, Mr. Paul Martin, impoverished the Canadians and
were very harmful to them and that they would have been more harmful, without
the expenditures, which are the refunding of the debt and the purchases of
securities by the Central Bank .
It is this
equation, which the competitors of Mr. Paul Martin, at the high position of
Prime Minister of Canada, that is:
John Manley, Allan Rock, Sheila Copps, Martin Cauchon, Brian Tobin,
Frank McKenna, must initially understand themselves, then explain to the business community, if
they want to win against Paul Martin.
CONCLUSION
The destiny
and the duty of a private enterprise are to make profits. The destiny and the duty of the State
are to make deficits. The payment
of the surpluses by the taxpayers, reduce the reserves of the banks. Their
reconstitution involves a rise of the interest rate in the overnight money
market which obliges the government and the Central Bank to inject liquidities
in the form of refunding of the debt for the government or purchases of bonds
for the Central Bank to prevent the rise of the interest rate. The refunding of part of the debt and
the purchase of bonds are expenditures which accompanies necessarily the
budgetary surpluses making them without any utility. To increase the contents of the right pocket by emptying
that of the left pocket and
to declare
that there is a benefit raise resort more to magic, the art to create
illusions, than to rational
management of the public finance.
The budgetary surpluses of Paul Martin, if they are the proof of
something, make especially the proof that Paul Martin is probably a good
businessman but certainly not a statesman, which really understand the very
nature of a modern State.
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