September 2004: All Debt Is Not Made Equal

Economics 101: Public debt is good, foreign investment bad
September 1, 2004

Read the financial pages of our corporate press, or listen to your average political commentary, and you’ll encounter the following standard propositions: 1) Foreign investment is good and should be encouraged. 2) Public debt is bad, and needs to be paid down quickly.

When it comes to their respective merits, however, the truth is pretty much the opposite.

Foreign investment is in fact foreign ownership. Calling it investment hides the reality, which is that foreign ownership is not investment, but really foreign debt, owed to foreign owners, forever, by Canadians. When what is owned—for all time, by foreigners, for their profit—is Canada’s natural resources, it takes a tight control over public debate to ensure that not too many people figure out what is going on, and that nobody believes we can do anything about it, anyway. Luckily for foreign owners (largely American), Canada’s media, our main political parties, most academics, and our business community have no interest in telling Canadian citizens that their resource heritage, which should be used for their benefit, has instead been handed over to foreign corporations.

As for public debt, contrary to what we’re continually told, that is what pays for investment in our health care, education, transport, culture, and other beneficial services. Debating and discussing what investments should be made on our behalf by our municipal, provincial, and federal governments is what representative government is really all about.

Foreign owners are what the Irish, in another era, called absentee landlords. They are still with us, though no longer drawn mainly from the English nobility. Nowadays, foreign owners are companies with household brand names and shares quoted on the New York Stock Exchange. These giant corporations are technically public companies because their stock can be bought and sold by the “public.” They are “governed” (in the loosest possible definition of the term) by boards of directors drawn from the business world and its servants in banking, law, accounting, marketing, and academe.

Foreign ownership represents a perpetual payment (not unlike a tribute) sent abroad by Canadians in profits, management, and service fees. Because transfer pricing prevails between the head office and the branch plant—not (repeat, not) competitive market pricing—arbitrary fixing of costs by head office allows for tax avoidance in Canada through the use of tax havens (or just clever accounting), and with the complicity of our federal and provincial governments.

This foreign debt is outrageously expensive when compared to current borrowing costs for governments. The Canadian government can sell huge amounts of long- term debt in return for offering 5.75% interest, or about 4% after inflation. By issuing real return bonds, the feds are currently borrowing money for 32 years at less than 3%. When the economy grows by 3% or more, the capacity to pay debt grows faster than the interest costs.

And what about those terrible interest payments which could go to useful purposes? First, for those mostly wealthy individuals who are lucky enough to hold lots of government bonds, interest payments are taxable at the top marginal tax rate, around 46% or 48% in Ontario or Quebec. So a sizeable percentage of the interest charges of the federal government come back to the provinces and the federal government as tax revenue.

But what about sticking the next generation with our debt? If that is a problem—and it would only be if we make poor investments, such as neglecting health care, education, the environment, infrastructure, etc., you get the picture—then there is a simple solution: Debt in the form of government bonds gets passed on in estates from one generation to another. So why not tax it, say, with an inheritance tax? Or tax it every year with a small wealth tax on large fortunes?

Public debt remains an income-generating asset for those who hold it: mainly Canadian residents, who hold over 80% of outstanding federal debt. As such, it represents a stock of financial wealth. When it is “paid down,” as it continues to be by the Liberals, to the tune of about $60 billion in recent years, that represents a shrinkage of wealth. What it does, of course, is open up room for corporate borrowers to tap into the debt market at lower cost, replacing the public borrowers. Not just autos instead of child care, but private expensive child care instead of affordable public services.

If you just figured out that the Liberals have been paying down public debt primarily to improve the financial prospects of corporations, you’re right. There is no other reason why they would needlessly starve health care, education, public infrastructure, culture, recreation, amateur sport, veterans, the poor, single parents, farm families, and Aboriginals.

It takes a well-trained market economist to explain why only private investment is productive and why public investment is not productive. How do they do it, you ask? Why, they just assume it. That is the way economists are trained. It takes many years to form a mind that routinely confuses playing “let’s pretend” with making informed judgments on public affairs.

I like to think Canada will eventually become a genuine democracy. It will happen when the working men and women of this country decide to pay attention to how their country is being run. It will not happen so long as they believe the lie that what is real investment in their future is a burden, and what strips them of their wealth is an investment.


(Duncan Cameron is a political scientist and commentator, President Emeritus of the CCPA, and a CCPA Research Associate.)