Now is the time not only to manage government debt responsibly, but also to restructure debt financing through the government access to capital markets.
Following the Great Recession of 2008 to 2009, governments in North America and elsewhere are faced with smaller tax revenues at a time when citizens rely more heavily on government funded social programs. This has resulted in significantly increased government deficits and debts, which in turn have put pressure on governments to reduce fiscal outlays for social programs in order to reduce the debt load.
Here, and in the United States, most of the social programs, such as health care, government pension plans and social security, employment insurance, etc., may be described as “unfunded liabilities.” This means that, with the exception of the Canada Pension Plan, social programs rely largely on tax revenues and interest bearing notes for funding, and are not supported by capital investments.
Paul Martin, while serving as Finance Minister of Canada in the late 1990s, put in place legislation that would allow Canada Pension Plan to access the capital markets in order to provide a capital base by purchasing equity funding for the Plan. Basically, the Canada Pension Plan assumed the same approach to funding as corporate pension plans. The Canada Pension Plan is now on much more solid footing with a capital and income base to weather economic storms and reduce the long-term burden on tax-payers and government debt.
Based on this experience, it would seem equally appropriate to apply the same measures to finance health care, and other social programs. For example, in the United States, the Social Security program, and government funded parts of Medicare, could be funded by the same means used by private insurance companies. In the late 1990s, former U.S. President, Bill Clinton, advocated such an approach to Social Security. That approach was not supported by Congress at the time. Our Canadian experience with the Canada Pension Plan has demonstrated the net benefit of such fiscal policy approaches.
While there will always be an ideologically based core group who advocate separation between government and private sectors, obviously there would be a net benefit to the private sector, as well as the public, if governments were to gain broader access to equity markets to fund and capitalize social programs generally. This is because, in part and over the long haul, it would bring a lower tax burden on citizens and corporations, would reduce government debt-equity ratios, and provide increased and lasting stability to capital markets.
Restructuring social programs as funded liabilities would allow governments to truly invest in the people they serve.