<- Retour
THE
STUPIDITY OF THE CANADIAN BUDGET SURPLUSES
Andre Gouslisty
Professor
of Economics ( retired )
November 9
2003
In
September 1992, at the time of the Treaty of Maastricht, the
members of
the European Union concluded a pact known as the financial
stability
pact. Under the terms of this pact, the signatory
members
committed
themselves to respect the following ratios:
- Debt /Gross domestic product
or GDP ratio , equal or smaller than 60 %;
- Deficit / GDP ratio equal or
smaller than 3%.
Now, in
October 2003, and in the light of 10 years of
experiment,
this pact of stability is qualified by Germany and France,
the two
pillars of the European Union and by some of the High
Administrators
of the Union as a pact of stupidity. And to play with
the word «
stable » it is described as a pact of stable stupidity.
Indeed,
each time the customer of a bank and almost always a tax payer
deposits an
amount in his account, the bank puts in reserve a certain
percentage
of it , around 5 %, and lends or places the remainder against
interest. For example if a customer deposits 1 000 $,
the bank pours
in a
reserve 50 $ and lends the remainder 950 $ against interest.
The purpose
of the reserve is to face the withdrawals of funds from
depositors. It is held in a very liquid form as for
example banknotes or a deposit at the Central Bank.
When the
bank draws from its reserves and loses some, it must
reconstitute
them by buying liquid funds in the market of the
short-term
funds. For example, if a depositor
withdraws 1 000 $, the
bank having
drawn in its reserves 1000 $ must reconstitute them by
borrowing
liquid funds for an amount equal to 1 000 $ minus 5% that is 950
$. The small
difference comes from the fact that having lost a
deposit of
1000 $ the bank does not have to put
any more in reserve 5% of
this
deposit.
When the
customer of a bank draws a check on his account to pay
another
customer, the bank draws from its reserves to
carry out
the payment order but, because the recipient of the check in
turn put it in his account the bank
recover the funds drawn
from its
reserve and does not have to reconstitute them by
presenting
itself on the market of the liquid funds. In this case the
bank did
not lose reserves.
When the
customer of a bank draws from his account to refund the bank
of a loan
that it granted to him in the past, the bank as always draws
from its
reserves to carry out the payment order but in
this case
it loses reserves because there is not on the other hand as
in the preceding example a
deposit. The counterpart is a
cancellation
of a claim of the bank and not fresh
money. There is thus
a loss of
reserves that the bank must reconstitute by presenting itself
in the
market of liquid funds as purchaser. That increases the demand for liquids
funds all other things remaining equal. There is here and in this case a
pressure to
the rise of the interest rate.
When the
customer of a bank draws on his checking account an amount to
pay a
tax, the bank as
always draws from its reserves to carry out the
payment
order but this payment is not compensated by a payment of
funds because the government sends the
check of the taxpayer to the
Central
Bank for cashing. The latter
debits the account of the bank
at it and
credit the account of the government. In this case there is a loss of cash for the bank and for the
whole
banking system The banks must reconstitute the
reserves
lost by presenting themselves in the
market of the liquid funds
as
demanders which made a pressure on the interest rate.
When the
government engages in a policy of budget surpluses, when for
example the Minister for Finance
announces like made M.Manley in the
week of October 20 2003 that for the
2002-2003 government carried out
a surplus
of 7 billion $, that means that the banking system has lost
during
2002-2003 , 7 billion $, and that it has to almost
entirely
reconstitute them by presenting itself as asker on the overnight money market .
Such a request does not pass unperceived and exerts on the interest
rate a
significant pressure to rise.
If the
interest rate at the time when are carried out the budgetary
surpluses
is the good interest rate i.e. the rate wished by the
Central
Bank, the pressure on the interest rate coming from
the banking
system obliges the Central Bank to intervene and to inject liquid funds by
purchasing treasury bills. These
purchases are an expenditure for the
Central
Bank but also an expenditure for the State if the State is
the
Government + the Central Bank.
Another way
of countering the pressure for the rising of the interest
rate coming
from the budgetary surpluses and by the channel of the
reserves of
the banking system, is to inject liquidities in the
market by
repurchasing bonds of the national debt i.e. by refunding
before term
the national debt. This is an
expenditure, a national
expenditure
if the State, it is the Government + the Central Bank + the
Administration
of the National Debt.
As one can
note it the budgetary surpluses i.e. the surplus of the
receipts on
the expenditure are not possible if the Central Bank
and the
Administration of the national Debt does not engage in expenditure.
The great
nonsense of the Accounts of the Canadian
government
is to regard as an expenditure the payment of the interests
of the
national debt but not its refunding.
Do the
statistics confirm or invalidate our remarks?
Between the
end of April 2002 and at the end of April 2003 and
according to
the information contained in the " Bank of Canada Banking and financial
Statistics
", October issue of 2003, page
S88, the securities of the government of Canada held by the Bank of Canada rose by 1 billion 393 millions of $.
Between the
end of April 2002 and at the end of April the 2003 assets
of general
public in securities of the Canadian government decreased by 8
billion 881
million $.
Consequently
between April 2002 and April the 2003 Bank of Canada,
which
manages also the National Debt, injected liquidities for more
than 10 billion $ to counter the pressures to the rise of the
interest rate coming from the budgetary surpluses of 7 billion $ and
coming from
other sources.
As one can
note it, budgetary surpluses cannot be made without impunity.
The first
harmful effect of the surpluses is a rise of the interest
rate. The budgetary surpluses cause, at the level of the banking
system, a
loss of reserves, that must be reconstituted
by
borrowings in the money market by an
amount equal to the budgetary surplus.
The second
harmful effect of the budgetary surpluses is that it
obliges
the Bank of Canada to inject into the money market
liquidities equal to the budgetary surplus to
prevent a rise of
the
interest rate. It is a national
expenditure not accounted in the
narrow budget of the government. The Bank of Canada never informed
the public
that they are, its injections of
liquidities and its refunding
of the debt,
which make the budgetary surpluses and not the contrary, the
budgetary surpluses
which allow the refunding of the debt.
The third
harmful effect of the budgetary surpluses is that they
generate
sterile expenditure in opposition to fertile expenditure. A
fertile
expenditure is an expenditure which the
counterpart is a
real asset
and not simply a financial asset. Refunding of the debt, an expenditure,
cancels a claim but does not create a real asset, the only really useful for
the tandard of living. To inflate the
financial assets of the Bank of Canada has much less value than to increase the
real assets of Canada like roads, bridges,
hospitals,
schools etc.
The fourth
harmful effect of the false budgetary surpluses of the
federal
government is to excite the covetousness of the
provincial
governments and to cause the requests to share the false
surpluses,
requests coated with very high considerations such tax imbalance.
The last
harmful effect of the budget surpluses and the desire to
reduce the
national debt is to induce the government of the
liberal
party to camouflage its intellectual penury, its lack of
imagination
and its lack of dynamism. To want to reduce the national
debt to 25
% of the GDP with false budget surpluses as M.Paul Martin
wishes it,
allows the government to lie behind this objective to do nothing.
One could
then expect that a government directed by Paul Martin will gives the management
of the Canadian State to a fiduciary like Canadian Steamship Line was given to
a fiduciary.
When thus
M.Paul Martin announces to whom wants to hear him that he
will follow
a policy of budget surpluses to refund the debt, he makes a proof of his
total
ignorance of the public financial mechanisms, because it is
the
refunding of the debt and the injections of liquidities by the
Bank of
Canada that finance the budgetary surpluses and prevent them
from
causing the rise of the interest rate and not the opposite as to many people
believe it
wrongly.
That a
pettifogging lawyer or a businessman, become Minister for
Finance,
while playing with their elbows, proclaim,
that it is the budget
surpluses
that allow the refunding of the debt we can understand that.
What we
cannot understand is that the Governor
of the
Bank of
Canada lets accredit in the public such an idea whereas he
knows very
well or he is supposed to know very
well, that they are
the
purchases of governmental securities by
the Bank of Canada and the
refunding
of the debt before term which make possible for the liberal
government
to spread out budgetary surpluses. Undoubtedly the
Governor of
the Bank of Canada has duties of recognition towards the
Minister of
Finance who named him but he has also
duties of honesty
towards the
Canadians and has the duty to give them the right hour. On this last
point we
can say that he failed and that he undermined
the
credibility
of the Bank of Canada.
To want to
bring back, as Mr. Paul Martin declares it , the Debt
/ GDP ratio
to 25 % whereas in the European Union one regards more and more
a Debt /
GDP ratio equal or lower than 60% as a stupidity and to want
to make
budget surpluses, as still M.Paul Martin wishes it, whereas in
the
European Union and in the light of 10 years of experiment, one
regards a
Budget deficit / GDP ratio equal or
lower than 3% as another
stupidity,
it is for M.Paul Martin to want to lead in Canada a policy of double financial
stupidity.
Under the
appearances of a rigorous financial management and an extra lucid one
which made
run tears of joy at this community of ignoramus of public businesses and public finance which is the businessmen
community , the years of the liberal management of Paul Martin, from 1993 to
2003, were ten years of impoverishment of the Canadians .
(see our article "
The wealth of the Canadians amputated by 350 G thanks to Paul Martin "
published in our internet site www.gouslistyandre.com).
Only if Mr.
Paul Martin changes his ideas and starts to make
deficits,
which would be a disavow of his convictions, if he really has
some, and
of his electoral program, it is extremely probable that the next
years will be
still years of impoverishment for the Canadians if he
accede at
the highest magistracy of the country.
