Wednesday, May 27, 2009

Reasons behind Canada's record deficit.

Fifty billion dollars equals about $1,500 per Canadian.

That's $6000 for a family of four.

So, why exactly is Canada going into such a huge deficit?

Here are three reasons.

The primary reason is lower taxes received due to capital losses replacing capital gains. If the average Canadian loses $5000 on the markets instead of making that much, that's a $10,000 loss to potential taxable income per Canadian.

A second reason is higher unemployment. More unemployment means more money paid out in EI benefits and less taken in.

The third contributing factor is poor taxation to compensate for the lower capital gains. The GST, instead of being dropped to 5%, should have been raised to 10% in order to shield us from out of control deficits. It doesn't take a rocket scientist to figure out income taxes will be down significantly this year. Apparently, Canada's current government didn't figure this out.

While a hike to 10% GST would have been unpopular, in fact it would have reversed a promise of the the Conservatives, it would have been their smartest economic decision.

In the best of years, Canada ran a $15 billion dollar surplus. That was during record oil prices and huge revenues from the oil sands. More typically, a good year might be around $6 billion.

In other words, it will take either ten years of constant economic prosperity and the resulting budget surpluses to pay off the 2009 budget deficit. Either that, or it will take ten years of 10% GST.

Estimates vary, but a reliable number pegs Canada's Federal debt at around half a trillion dollars. So, if a good year yields a 6 billion dollar surplus, we're looking at 90 years worth of good budget surpluses before we can pay off our current debt.

The problem with debt is that it spirals. A point is reached where, even in a good year of taxation, all of the taxes go to servicing the interest on the debt.

In the US, their national debt sits at around 12 trillion dollars. That's $30,000 per US citizen, and $120,000 for a family of four.

If, at the modestly low interest rate of 2.5%, the average tax per household would be over $3000 just to service that debt. If interest rates go up to 5%, that doubles, etc.

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