There is a way to reduce taxes without increasing the deficit, or causing inflation, or destroying Canada’s social programs. According to Statistics Canada, about one hundred billion dollars ($100B) of new debt is created in Canada every year1. Roughly half of it is borrowed by our various levels of government, the other half is borrowed by individuals and businesses.
Whenever a new loan is made, new credit money is created for the borrower to spend. The moment the amount of the new loan is entered into a computer as a credit to the borrower’s bank account, the nation’s money supply (or collective purchasing power) increases by the exact amount of the loan. This may be a new concept to you but it is really very simple to understand.
If you deposit $1,000 into a savings or term deposit account at your bank, then legally your bank can lend $1,000 (and even more eventually) to someone else. As a depositor you still own the $1,000 you deposited. You have merely postponed temporarily your right to purchase goods and services yourself with that money. You may still withdraw your savings and use your purchasing power at any time. On top of that, however, the borrower now has an equal amount of buying power derived from the same money that you deposited. It is this additional purchasing power, created out of thin air by simply transferring credits on a computer, that causes a growth in the money supply. Of course as the borrower pays back the principal on the loan, the money supply shrinks again in an equal measure.
Most of the nation’s purchasing power, or money supply, is in fact created as credit in this way. According to the Bank of Canada, only about $27 billion of currency is needed to keep the economy running2. Canadians have accumulated nearly two trillion dollars ($1,915 billion) in outstanding debts and our total financial liabilities ($4,700 billion) account for about two-thirds of the nation’s total asset base ($7,200 billion)3. Who gets to increase the nation’s money supply by creating the new credits is of the utmost importance.
Today privately-owned capital markets create nearly all of the credits that keep our economy going, but it was not always that way. At the time of Confederation, the founding fathers of Canada gave the federal government the sole authority to create the money supply of the nation. As the country grew, the federal government chose to share more and more of this responsibility with the private banks. The Great Depression prompted the government to rethink just how much control over the money supply it should really relinquish and in 1935/6 the Bank of Canada, a national central bank owned entirely by the government of Canada, was formed “to regulate credit and currency in the best interest of the economic life of the nation…”4.
The Bank of Canada has the power to create the credit that both the federal and provincial governments need to run the country. Up until 1977 the Bank of Canada did supply the federal government with roughly 20% of its credit requirements. When the government borrows from the Bank of Canada, any interest that it must pay returns to the government as revenue from the Bank of Canada, effectively reducing its borrowing costs to zero. While borrowing too much money can lead to inflation, once the decision to borrow has been made it is no more inflationary for the government to borrow from the Bank of Canada than it is for it to borrow from private financial markets. In fact, it is less inflationary by exactly the amount of the interest that the government saves by using its own bank.
Statistics Canada reports that in 1995 all levels of government in Canada had accumulated $845 billion in outstanding debt5. Less than 5% of that amount is currently held by the Bank of Canada. The interest cost of servicing that debt is about $76 billion annually, or about 50% of the amount that all levels of government collect in direct taxes from people each year. If the federal government simply instructed the Bank of Canada to start purchasing existing government debt only, as it normally becomes due in the financial marketplace, not only could the government eliminate its operating deficit much more quickly than it is doing now (by lowering its borrowing costs), but it could begin reducing individual income and property taxes and still have enough money to begin paying back its debt principal without further eroding essential social benefits such as health care and education funding. Even if the Bank of Canada only purchased 42% of the nation’s existing government debt, the annual deficits of all federal, provincial and municipal government operations could be eliminated. If the Bank of Canada purchased two-thirds of the existing government debt, personal direct taxes (ie. income and property taxes) could be cut by 10% and the remaining $3.3 billion saved in interest costs could be used to pay down the principal amount of our public sector loans. If the Bank of Canada reverted to the intentions of the Fathers of Confederation and assumed the full responsibility for supplying all the credit needs of our governments, then personal taxes could be cut by 20%, all government deficits could be eliminated and an additional $13.3 billion would be available to pay down the principal amount of our public debt without any further cuts to social programs.
Not one penny of new debt would be created, so the total money supply would not change and there would be no risk of inflation. No funds currently used to support business investment would be affected. On the contrary more private funds would be available for new (small) business investments and the increased supply of private investment capital would bring down interest rates even further. The tax cut would help stimulate consumer confidence and if consumer spending began to rise the increased supply of investment capital would ensure that our productive capacity could keep pace with the higher consumer demand without triggering inflation. Unemployment levels could finally begin to fall, reducing government costs and tax levels even further. Perhaps most important of all, our governments would no longer be dependent on obtaining the approval of foreign investors or subject to the discipline of international capital markets in order to finance their operations. The government could once again formulate policies according to the best interests of average Canadians rather than according to the dictates of the financial elites.
Please consider this idea carefully and talk it over with your friends. Force the candidates in the upcoming federal election to discuss it... make it an election issue. Those who create the money and credit supply for the nation really do control the destiny of the nation, so let's start democratizing Canada's money supply right away.
Footnotes: 1 Statistics Canada Catalogue #13-214, National Balance Sheet Accounts, Annual Estimates, 1995, Table 2, Credit Market Summary Table 2 Bank of Canada Review, 1995 3 Statistics Canada Catalogue #13-214, National Balance Sheet Accounts, Annual Estimates, 1995 4 Bank of Canada Act 5 Statistics Canada Catalogue #13-001, National Income and Expenditure Accounts, 1995