How timely. With the G7 summit coming to an end in Iqaluit, I've gained some understanding to the financial plight of the current Canadian government. Please be patient with my simplistic analysis of the situation:
In the early 2000s, the Canadian government was enjoying a healthy budget surplus. Elections were fought based largely on whether this surplus should be used to pay down the accumulate debt or cutting taxes. Tax cuts won out shortly thereafter the GST (goods and services tax) was cut from 7% to 5%.
What I've learned in class:
1. The GST is a roundabout way of encouraging saving because the tax is only paid when you buy something.
2. Lots of saving = increased productivity. Why? Basically, the more households save, the more funds are available for borrowing. Interest rates are lower thus corporations are apt to borrow funds to invest in buildings and equipment which are used to produce more things.
3. Budget deficits ultimately increase interest rates and cause investment (& productivity) to fall.
If the above is true then the cut in GST, the promise that helped elect the current government, was a terrible idea and has severely impacted our ability to dig our way out of this recession.
Less intake in taxes means the government is now running a (growing) deficit which will ultimately mean that the interest rates must rise (currently interest rates are artificially low). Rising interest rates mean less investment and lower productivity. Plus, households aren't saving as much which again means that the supply of funds available for borrowing is reduced. Ouch!
I now understand the tough position that the government has put themselves in, but I'm having trouble being sympathetic. If in 3 weeks, I can learn the basics, the government should have done a better job anticipating this eventuality.
Bah! I can't believe I just posted about politics! I'm having trouble deciding whether I've hit a new high, or low...
No comments:
Post a Comment