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politics

No Interest in Paying Interest Payments

The Budget Committee, once again, fails to understand how budgets are supposed to work.

On Tuesday, the Budget Committee met to finalize its draft of the 2013 operating and capital budgets. (They go on to the Executive Committee today and to council next week, where they may be revised further.) During that discussion, councillor John Parker (Ward 26, Don Valley West) fired off four tweets that nicely encapsulated the rigid economic orthodoxy of the Ford administration, if that’s what we’re still calling this thing that’s going on now at City Hall. Our Mayoral Interregnum?

“Comments at this afternoon’s budget committee meeting note high level of capital spending paid from current revenue. As if it’s a bad thing,” went the first tweet.

Moments later came:

Followed by:

And finishing off with a populist rhetorical flourish:

All very reasonable-sounding, from a reasonable-seeming councillor sitting in the reasonable zone on the right side of the political spectrum.

Except they actually aren’t.

Note, if you will, the theme running through Councillor Parker’s tweeted thoughts. For the City to build things, big things, things that are necessary for it to function properly (roads, public transit, everyday infrastructure needs)—the capital spending—we must sacrifice a certain level of daily niceties like firefighters, recreational programs, and late night bus routes in under-serviced areas. All the stuff paid for from current revenue and casually referred to by the councillor as “other operating budget priorities.”

It’s an entirely fabricated zero-sum equation beloved by conservatives of all stripes who, in their heart of hearts, resent paying taxes and fundamentally believe governments should have a very limited role in the running of society. To them, the notion of public debt represents profligacy and overreach. A government without debt is the ideal state for conservative thinkers. Politicians like John Parker dream of a time when we are debt-free and we can then spend “more resources for other operating needs” in order to have “a more secure future.”

Superficially, this argument makes a lot of sense. Money spent on debt interest payments is less money spent on everything else. That’s just basic math in a world where those are the only two options available.

But look behind the curtain of this secure, debt-free future. There are only a couple of ways to minimize debt payments: with lower interest rates, which are largely beyond a City government’s control, or by minimizing debt. You minimize debt, you minimize the number of big ticket items you can afford beyond what you can pay for immediately.

Again, that all sounds very sensible and fiscally prudent until you realize that very few people or businesses actually operate like that. Everyone has access to debt, whether it’s credit cards, mortgages, car payments, or small business loans. The key is having the right kind of debt, and managing that debt properly.

Only in the fevered minds of politicians like the Ford brothers, budget chief Mike Del Grande, and Councillor John Parker has the City of Toronto not properly managed its debt. They point to rising expenditures on both the operating and budget sides of the ledger as proof of out-of-control spending during the Miller years, ignoring other possible causes like a growing population, continued intransigence on the part of Queen’s Park and Ottawa to equally share the burden of local governance, and aging infrastructure in need of good repair work. But debt, to them, is always and only the result of bad management, not a legitimate financial tool to be utilized for the good of the city.

Responding to Parker, one Twitter commenter wrote this:

That may be true of some on the budget committee (I’m looking at you, Councillor Di Giorgio), but I think Councillor Parker is smarter than that. He does understand the value of debt and its power to enable governments to build and maintain the foundations of a liveable society. It just grates his conservative ideology—and possibly his perception of his re-election chances. This is the same ideology, and same political considerations, that rule out serious talk of robust ways to increase revenues rather than cutting costs and services.

When it comes to City budgeting, there’s little perceptible difference between Parker and his more rabid conservative colleagues. It’s all about costs. Costs, costs, costs. Benefits rarely enter into the conversation. And revenue? That’s just another word for taxes, and for conservatives, well, “Toronto taxpayers are not a community of human cash registers.”

As we head into next week’s final budget lap, don’t let Parker’s pleasant, low-key demeanour and mildly amusing and innocuous-sounding tweets fool you. He’s a conservative through and through, and while they all may be preaching fiscal prudence, they’re not articulating principles that make fiscal sense.

Comments

  • Brandon

    Well written piece indeed. The issue with a lot of politicians today under the fiscal crunch is that they seem to believe that we must stop everything and hold the status quo until we can pay back all the debt the City owes. At first glance you might think this is a smart financial move. Who wants to be burdened with debt after all?

    When you look more deeply though, there is no way large infrastructure projects can be done without incurring debt. no jurisdiction in Canada has enough revenue to pay for massive infrastructure all at once.

    Its why we take out leases on cars and mortgages on houses. we cant pay it all right now but we will pay your back slowly using a known source of stable income. And I’m sure every politician on council has incurred some sort of large debt for exactly this reason in their lives.

    • Anonymous

      I don’t understand borrowing money to buy a car, given you can get a car to suit any budget. (I agree with your point about municipal investment – I just think a car is bad example.)

      • Brandon

        Fair enough the car may be a poorer example. :P

      • Rob Ford’s Underwear

        Cars -anything around household finance – are not directly comparable. Right now it actually makes sense to borrow as much as you possibly can, since rates are so low. If you borrow 10k, you might pay $100 a year to service it. Put the 10k you didn’t save in a GIC and you get back $250, a net profit of $150. More if you are a bit more aggressive with your investments.

        On municipal projects, the investment “returns” are less tangible but still exist. In all likelihood the economic benefits of a needed improvement outweight the interest costs of issuing a bond to pay for it.

        • Anonymous

          In short, municipal finances aren’t like personal finances or corporate finances. Who knew?

  • Daver

    The city of Mississauga backs up your point perfectly. Those people love their Mayor. Ask them why and you’ll get a shrug of the shoulders and “uh… she’s a great financial manager -no debt”. My response: “yes, and it shows”. Mississauga is a fine little bedroom community if that’s what you like, but they could have been so much more -if they had a Mayor with some vision. They could have been a city that Torontonians love to visit and hang out in. A city with modern infrastructure, culture, and sophistication. Instead, they have Square One. Bravo.

    • stopitman

      Actually, as of last year Mississauga had already burned through their massive stockpile of cash (in the 100s of millions of dollars) and has already managed to accrue a $450M infrastructure backlog ($1.5B within the 20 of years). Also note that the $1B does not include sewers, regional roads, or watermains and associated infrastructure like it does in Toronto because that is paid for by the upper tier municipality (Peel).

      Look at the property tax increases because of it – almost 10% last year (~2% from Peel) and 7-.4 this year (+0.5% from Peel).

      Mississauga is the epitome of poor city building and poor financial planning, and those two are tightly interrelated. It’s too bad that people like Ford try to emulate the joke that is Mississauga’s planning and financial model, or lack thereof of both.

  • Heather

    As someone who favours ‘progressive’ policy and lots of public sector ‘investments’ in both infrastructure and ‘hard services’, I fail to see the problem with a low to no-debt preference.

    Of course that preference shouldn’t be dogmatic.

    Nor should it be an excuse for failing to create or sustain necessary and highly desirable public services.

    However, social programs and infrastructure investments can be paid entirely or in far greater proportion on a cash-from-current basis. Or in plain English, they can be covered by our taxes in real time.

    The suggestion that everyone requires a credit card and mortgage is at best a logical fallacy.

    I have a decent job, I’m in my 30s, I rent, I don’t own, and If buy I’ll put 50% down, because I saved for it.

    I choose car-sharing over ownership.

    And while I have a credit card, its rarely used, and the debt never incurs interest.

    I buy those concert tickets with the money I saved, not with money I have yet to earn.

    That does not mean I don’t go to concerts, have access to a car or a nice place to live. It means I defer gratification for just a short time, and save first.

    That’s not a particularly conservative philosophy, nor is in opposition to robust public investments.

    Its a matter of personal (or governmental) sovereignty; and of having the sense not to enrich creditors at the expense of the very necessary public investments that ought to be made.

    That doesn’t mean Toronto should never borrow; when total debt (municipal) is in the billions and interest costs are in the hundreds of millions (enough to eliminate all recreation user fees, and open libraries till midnight every night, and boost TTC service, while still having change leftover); we need not suggest that inadequate borrowing is a real problem.

    Inadequate taxing might well be.

    • Anonymous

      Any capital investment yields benefits – what if they outweigh the interest? What about the lost benefits from “saving up”?

    • Brandon

      as tomwest explained, its not all about the monetary costs but also the opportunity costs and the affects of pursuing or foregoing investment. Simple economic theory :)

      Additionally this city has reached something of a critical point in forgoing investment and losing benefit. its time that we address the issues with clear thinking, and debt financing if it is ever needed, is a very alluring tool given the city’s rock solid credit rating.

      • Heather

        Tom: The benefits can be achieved by making the investment from cash (current or dedicated) taxes. Its not an either we invest or we don’t; its HOW we pay for the investment. I would simply contend, than in most, not all cases, the benefit from paying from current and/or saved cash is greater than that from borrowing.

        Its not as if we need to borrow (which we do) to cover routine capital costs such as playgrounds or road resurfacing.

        I’ll concede that a new subway line is a different matter; but debt even there need not be the only (or full solution)

        City revenues come from a diverse range of sources, property tax, land transfer tax a host of fees etc.

        Let’s assume we wanted to pay for a new subway at six billion in cost.

        The City generates roughly 10B in revenue each year.

        That means a 2% dedicated increase would provide around 200M per year, a subway takes roughly 7 years to build in this City, so that would be around 1.4B over the project life. Why not use that to reduce it from 100% debt to 80% or under? (or an even larger dedicated revenue stream to greater effect)

        What opportunity does that cost vs having to pay around 5% interest to service debt? Above and beyond repaying the principle?

        The latter involves, over a typical 20 year bond cycle paying for a project twice!

        Brandon: There is a need for investments, I’m not arguing that point at all. Its only a question of how to pay for them. Yes, let’s tear down the Eastern Gardiner and probably ameliorate the rest. Yes, let’s electrify the GO Lakeshore line and more than double service frequency; yes let’s get a downtown relief subway line.

        I’m just saying, what’ wrong with paying for it via $4 toll on the Gardiner and the DVP; where that does not cover the whole cost, I’d be open to debt-financing the balance.

        I just don’t see debt as a finance of first-resort option; more of a last-resort option.

    • https://paul.kishimoto.name/ Paul Kishimoto

      In discussions around the U.S. “fiscal cliff”, I’ve seen a number of good repudiations of analogies between household and government finances (Keynesian stimulus, for instance, makes no conceptual sense at the household level, nor is it meant to). It was the author’s mistake to use that line of argument, and yours to use it in reply; neither is very convincing.

      Cllr. Parker’s position doesn’t admit of thresholds; it is entirely dogmatic. And while we might quibble about a theoretical possibility for capital spending without debt given adequate taxation, the issue is that taxation is currently NOT adequate, and Parker etc. are ALSO dogmatically opposed to taxation.

      From a number of individual positions that are half-sensible, or at least arguable, individually, neoconservatives set up the hard limits on spending and zero-sum game they need to pursue reductions in social spending, capital investment, or both.

    • Anonymous

      In response to your “low to no debt” lifestyle: you say you prefer car-sharing over ownership. Do you think your car-sharing company bought its fleet without debt? Do you think the concert venues you go to don’t have mortgages? Do you think your landlord doesn’t have a mortgage, wouldn’t take a loan to fix a leaky roof? Your life is enabled by debt, it’s just one layer away from you.