Interest-free Government Borrowing
If adopted, this motion will dramatically change the party’s fiscal policies by introducing the requirement that the federal government borrow from the Bank of Canada.
WHEREAS government debt is reaching such critical proportions that many countries are currently facing financial collapse because of the interest on the debts they owe to banks;
WHEREAS Section 91 of Canada's Constitution (classes 1A, 4, 14, 15, 18, 19 & 20) on the Legislative Authority of the Parliament of Canada stipulates that Parliament has full control of the public debt and interest, as well as the right to issue money;
WHEREAS the interest on money borrowed by the government through the issue of treasury bills and bonds purchased by banks and foreign governments now accounts for about 90% of the total market debt of $596.8 billion (31 March 2011) owed by the people of Canada, and repaying that interest is advantageous to banks but deleterious to the welfare of the country;
WHEREAS the Bank of Canada issues interest-free currency into circulation for the benefit of the nation, though this is currently only about 5% of the country’s money supply, under the authority of the Bank of Canada Act it is authorized to make interest-free loans to the Government of Canada to make up budget deficits and is currently doing so, by holding approximately $60 billion in Government of Canada bonds and treasury bills;
WHEREAS the Bank of Canada currently lends the Government of Canada money interest-free through the purchase of government bonds and treasury bills;
BE IT RESOLVED that under the powers granted to it under the Constitution, for all future deficits the Government of Canada borrow money interest free, through the purchase of Government of Canada bonds, but to prevent unrestrained borrowing it be limited by only being permitted when the government is maintaining an operational surplus.
The Canadian government has been running deficits since the Trudeau years, except for a few years under Paul Martin when it was finally, painfully, able to move back into a surplus. But even when running a surplus, the government is still paying down the debt accumulated over those decades - debt which is composed of principal, interest, and interest on interest. And interest on interest is by far the largest portion of that debt. A 1993 Auditor General report said that of the accumulated net debt of $423 billion, only $37 billion was principal - the rest was due to the ‘magic’ of compound interest. Thus, a very large portion of all of the painful cutbacks, program cuts, etc. needed to ‘pay down the debt’ are to pay interest on debts owed to bankers. In 2009 (the last year for which data is available on Statcan), Canada paid $28.882 billion in interest charges. Since then, with a return to deficit budgets under the Conservatives, that figure has been rising.
It doesn’t have to be this way. This system of government borrowing is rarely questioned because the people running our banks and central banks have a vested interest to keep the system as it is because it works very well for them - they receive billions in interest payments for the ‘risk’ of lending governments money.
Instead of borrowing money at interest, the Canadian Constitution empowers the Government of Canada to issue money directly, as it already does in the case of the paper notes and coins in circulation, which only make up a very small percentage of the total money supply. The Bank of Canada Act also permits that institution to lend the government money interest-free. In its Bank of Canada Resolution of 2010, the Green Party has policy to advocate that the government do exactly that, and given the current world debt crisis, we believe the Party should be actively promoting this policy.
If this is such a great idea, why aren’t we doing it already? Well, as a matter of fact we are: the Bank of Canada currently holds $64 billion in government bonds and treasury bills, and the interest that it earns is credited back to the government, effectively making it an interest-free loan. This resolution advocates that this kind of borrowing be increased. To prevent the possible abuse of governments borrowing too much and bring about ruinous inflation, it includes the check that the mechanism can only be used when the government is not running an operational deficit; i.e., when its revenue from taxation exceeds its expenditures. Thus, it can only be used to deal with our past accumulated debt, not for current spending.
SHADOW CABINET COMMENT
The GPC Shadow Cabinet believes that this is not a fiscally responsible policy. The Bank of Canada already lends at no interest to the government but when it determines that such lending would be inflationary, it requires the government to borrow on private markets. This resolution would undermine the ability of the Bank of Canada to carry out its mandate to control inflation. This approach to government borrowing is essentially the same as was used in Argentina, leading to chronic hyper inflation at great social cost.
This resolution is at odds with full cost accounting principles by suggesting that no cost borrowing is a viable financial solution with no attendant consequences. The GPC Shadow Cabinet believes there is no such ‘free lunch’ and that the only viable way to achieve a reduction in national debt and interest burden is by ensuring that total revenues exceed total expenditures.