The first Olympic Games were held in Greece. Now they are in British Columbia. Out-of-control government spending, fuelled by debt, has sent Greece to the brink of bankruptcy. The government of British Columbia has also been on a debt-fuelled spending spree. Greece, as part of the European Union, is being forced into an economic austerity plan. British Columbia’s taxpayers should take note because what is happening in Greece gives us a glimpse of the threats posed by debt here in B.C.
The B.C. government likes to claim it had to run a deficit because the recession drove tax revenue down. However, a closer look at the books shows the real reason the government is running a deficit—skyrocketing spending.
B.C.’s Liberal government was elected on a platform of fiscal responsibility and started off well. Between 2001 and 2004, government spending hovered around $30 billion per year. The government commendably reduced the debt from almost $38 billion in 2003 to $33.4 billion in 2006. However in 2005, spending restraint started to fly out the window—a result of that dreaded second-term spending disease that seems to infect governments at re-election time. Spending rose steadily to $40 billion in 2009 and is expected to hit $42 billion in 2011. This could send the debt to almost $60 billion by 2013, practically double its 2006 level.
No problem, some say—the government needs to spend more now to stimulate the economy and protect healthcare and education. But the legacy of debt created by out-of-control spending threatens healthcare and education.
In fact, Greece provides a good example of what happens when government spending flies out-of-control.
When Greece joined the European Monetary Union (eurozone), its interest rates fell. That’s because investors assumed strong countries in the eurozone, like Germany, would help weaker countries if they got into trouble. Greece then went on a debt-fuelled spending binge, and its economy and voting public adapted to high government spending subsidized by low interest rates. The binge in Greece ended with the economic downturn in 2008. Suddenly, the low interest rates Greece paid on its debt started to rise as investors worried it would default on its payments. Greece practically stimulated itself into bankruptcy.
The binge left Greece with a very bad hangover. The Greek government has now laid out an austerity budget, cutting $3 billion in public spending in part by freezing public sector wages, cutting public sector employment, and increasing taxes on gas, tobacco, and alcohol. Spending addictions aren’t cured by squeezing even more money out of the pockets of taxpayers, but the spending cut is a move in the right direction.
The Greeks know they are in serious trouble. The Greek finance minister, George Papaconstantinou, recently said: “We’re trying to change the course of the Titanic, it cannot be done in a day.”
Is B.C. also taking a ride on the Titanic? Taxpayers now spend $7 million per day to fund the debt, and that will go up to $8 million per day in 2011. This is money that could otherwise be spent on healthcare, education, or, better yet, tax cuts. But no, it goes to bondholders to pay the interest on the debt. Interest rates in Canada are expected to rise later in 2010, which will send debt servicing costs even higher, meaning more money for bondholders and less money for health care and education.
Left unchecked it will invariably mean higher taxes, as the Greeks are discovering.
Fortunately, we haven’t hit the iceberg yet. There is still time to change course. The B.C. government must cut spending and start on a real program of deficit and debt elimination. Otherwise we’ll be sharing more with the Greeks than just the Olympic Games.
Maureen Bader is the B.C. director of the Canadian Taxpayers Federation.