Politicians Avoid Issue Costing Hundreds of Billions of Dollars
Taxes go up. Services go down. Pot holes get bigger.
Infrastructure deteriorates. Long term planning is postponed.
Not one of the parties in parliament has been willing to talk about the issue which has cost Canadian tax payers hundreds of billions of dollars. There was a lot of noise when the $100 million sponsorship scandal took place, but the mother of all scandals — which cost 600 times as much as the sponsorship scandal and continues year after year — has received nary a mention. This scandal is the failure of our politicians to support use of the Bank of Canada to finance government debt and the capital costs of public infrastructure. It costs our governments at all levels over $60 billion every year. Journalists don't write about it and politicians don't talk about it, yet it is one of the main reasons why we don't have enough money to pay for health, education, infrastructure and all the other things we think of as necessary for our society, why municipalities are almost swamped with downloads and why property taxes are rising.
If a public capital acquisition (e.g., subway, sewers, water system, etc.) costing $100 million were amortized over 20 years at 6 percent (which is what a private lender, bank or developer might charge) the cost would be about $8.5 million per year. If the facility has a life span of 50 years the payments, using the Bank of Canada, could be amortized over 50 years and would amount to $2 million a year plus the cost of administering the loan — less than 1/2 of 1 percent. In this example, financing public infrastructure with our public bank would reduce annual payments by about 70 percent.
The Bank of Canada was nationalized by Prime Minister Mackenzie King in 1938. It helped to finance WWII and all the enormous development after the war until the mid 1970s. It did all this without creating inflation, (inflation rate: 1950, 2.8; 1971: 2.9). One of the tools used to control inflation was the "statutory reserve" which was rescinded by Brian Mulroney and would have to be reinstated. Policy changed as the western world got caught up in the extreme free-market ideology promoted during the 1960s. Privatization became the vogue, including privatization of our money supply, as government reduced its borrowing from the Bank of Canada and increased its borrowing from the private sector. Federal debt increased by 3,000%, from $18 billion in 1974 to $588 billion in 1997, with huge increases in debt financing. To cope with these costs the federal government reduced transfer payments and downloaded programs and services to the provinces which in turn downloaded them to the municipalities. Municipalities have had no alternative except to raise taxes or cut services or both.
The usual excuse given by government for not using the Bank as it has been and could be used is that it would cause inflation — in spite of the record to the contrary. Other possible reasons (not mentioned by government):
• Chartered banks, wealthy financiers and some pension funds would howl at the loss of easy guaranteed income from lending to the government;
• The free-market ideology mentioned above;
• Central banks, coordinated by the BIS (Bank for International Settlements) support current policies;
• The fear that if Canada's monetary policy should veer substantially from the free-market ideology, world financial interests would come down hard on Canada, business would be hurt, jobs would be lost.
Referring to the Bank of Canada Act
The fear of repercussions is like a straight jacket limiting the actions of politicians. To get out of the free-market straight jacket requires politicians who recognize both the problem presented by the way the Bank is currently used and the strength which would come from using the Bank as it could and should be used. Canada has immense natural resources and a well-educated work force. Through its Bank it could finance infrastructure renewal, education, health services, housing and other community needs. The spin-offs from such activity would stimulate the private sector and create many well-paid jobs. The Canadian Labour Congress should support this use of the Bank because of the great benefit to Canadian workers.
The authority and power for doing all this comes from the Bank of Canada Act.
Section 18(c) of the Bank of Canada Act states that the Bank may buy and sell securities issued or guaranteed by Canada or any province. This means that municipal securities could be bought by the Bank if they were guaranteed.
Section 17(2) states that the capital (of the Bank) shall be held by the Minister (of Finance) on behalf of Her Majesty in right of Canada. This means that the Bank is wholly owned by Canada which receives as dividend the net income earned from interest or otherwise. It also means that interest paid by the Government of Canada to the Bank is returned to it as dividend less the cost of administration (very minimal). Interest which might he paid to the Bank by a province or municipality also becomes part of the government's income. By agreement, this interest could and should be returned to the province or municipality less the cost of administration.
Section 14 states that the Minister and the Governor (of the Bank) shall consult regularly on monetary policy. If a difference of opinion should emerge between the Minister and the Governor concerning monetary policy, the Minister may give to the Governor a written directive and the Bank shall comply with that directive. This means that the Bank is not independent.
There are no international laws preventing the Bank from being used to finance public debt or infrastructure, but international agreements can have the same effect as law if we do not challenge them. Examples of such agreements are those arrived at by the governors of the central banks of the western nations during their meetings organized by the Bank for International Settlements.
So, what to do? Vote only for candidates who agree to support use of the Bank of Canada to finance public debt and public infrastructure — even if their parties have not included this in their platforms.
Richard Priestman Kingston Chapter, COMER
– from Economic Reform, November 2008