Michael Gurstein
Sat, 16 Oct 1999 07:07:45 -0700
----- Original Message ----- From: Silver Donald Cameron <[EMAIL PROTECTED]> To: <[EMAIL PROTECTED]> Sent: Saturday, October 16, 1999 5:29 AM Subject: ER9910-#1 Are We Missing a Heaven-sent Opportunity? > Greetings all: > > The newsletter which follows is a fairly technical economists' publication > which I (sometimes) wrestle my way through with some difficulty. (Not all > its issues are technical or difficult.) But Mr. Krehm seems to know his > stuff, and the lunacy of recording the government's acquisition of, say, an > office building on the books at $1, and writing it off in one year, flies > in the face of everything I understand about intelligent accounting > practices. > > Krehm has often made the point that poor accounting has sustained poor > financial policy, which in turn has supported the structural changes which > are causing us all so much grief. > > What follows are two issues of the newsletter -- one from two months ago > announcing an important change in the way the government keeps its books, > and a current one commenting on the failure of people like us to grasp what > the means, and to take action. > > I'm thinking of trying to sort my way through this current change in > accounting procedures in Ottawa and doing a column on it. Any comments > which might help me? > > Cheers, > Don > > >WELCOME > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > > > > Welcome to erMail, the email subscription service of the > >Committee on Monetary and Economic Reform (COMER). Thank you for your > >interest. > > erMail is the electronic edition of "Economic Reform," COMER's > >print edition monthly journal. erMail contains article extracts from the > >monthly print issues, and may occasionally include additional material. > > You are receiving this electronic service currently to > >encourage wider distribution of COMER material, with its timely > >commentary on economic and monetary matters not necessarily found in the > >mainstream press, but equally valid and necessary to public debate and > >discussion. > > This complimentary distribution is subject to change at any > >time. > > You may re-distribute this message. Proper acknowledgement is > >appreciated. > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > > Also note that this message may be forwarded. Please check the > >header information carefully before sending a message to COMER to > >request removal. > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > >Subscribe: > >mailto:[EMAIL PROTECTED]?subject=subscribe > >Unscubscribe: > >mailto:[EMAIL PROTECTED]?subject=unsubscribe > > > ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > Capital Budgeting at Long Last Limps into Ottawa > ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > Ideological bias postponed the arrival of capital budgeting to Ottawa > for forty years after Royal Commissions and occasional auditors-general > had recommended it. That meant that when the federal government acquired > a building or equipment that was bound to last for years, its total > purchase price or cost would be written off in the year of acquisition. > Underlaying this non-accountancy was the deeply rooted prejudice that > governments could do nothing but waste money and hence were not really a > serious part of the economy. On the balance sheet of the government > should the cost of such capital assets was shown as debt, but there was > no asset on the other side of the sheet to balance against this. > > In the second issue of ER (then known as Comer Comments) in > the fall of 1988 wrote: "Today the federal government has no capital > budget. The public accounts...are a cash-flow exercise. It writes off > purchases of land, buildings and equipment in a single year." > > Were private firms allowed such write-offs they would have to > hoist their prices drastically. There is no reason to believe that such > flawed accountancy has a different effect on the public sector. > > The resistance of the government to carrying out the > recommendations was disastrous for the country. During the sixties vast > investments had been made in physical and human capital. To educate the > baby boomers who were reaching post-secondary schooling age new > university and college campuses sprang up throughout the land. The > health and social insurance welfare systems were brought in. Inevitably > this involved immense capital investments, and writing them off in a > single year could only push up prices. Trying to pay for the > infrastructure for these or even writing off the increased stock of > education in a single year loaded prices needlessly with taxation. > Monetarist ideology ensconced in the Bank of Canada exploited the price > rise that began in the sixties without even to push up interest rates to > the mid-twenties in the early 1980s. That created the jump in the > federal debt, that in term served as a pretext for keeping interest > rates high. > > The introduction of accrual accounting - i.e. depreciating the > cost of a capital asset over its term of usefulness - will take place > over a two-year period. "With the stroke of a pen, the federal > government could find itself with an extra $50 billion worth of assets > on its books. But Denis Desautels, the Auditor-General, warns the sudden > appearance of $50 billion worth of assets on the balance sheet won't > change Canada's financial position." Kathryn May in The National Post > (Southam News), July 20. > > One of the basic criterion for judging a firm's financial > position is comparing its assets and its debt. Having $50 billion more > assets suddenly appear on the government's balance sheet will make > possible for it to borrow money at a lower rate of interest, just as it > would in the case of a private firm. > > If anti-public sector bias delayed the recognition of > government assets with disastrous results for most people in the > country, a not dissimilar bias contributed to the nature its present > implementation. > > The same article quotes John Williams, the Reform MP, who > chairs the Commons public accounts committee saying, "This isn't an > extra $50 billion to go shopping with. These are assets bought and paid > for in the past. It's like finding another car in the garage - you don't > go out on a spending spree unless you sell that car." That is not > necessarily so. If the old car is broken down or has already been sold, > so that you walk to work, you might have good provident reason for using > that car as needed. > > The article continues: "It will also reconcile the books, > which have overstated the government deficit, accumulated year after > year since Confederation. The government's assets are now officially > worth nothing. The have never been recorded on the books and everything > purchased or built over the years has been expensed - and piled on the > deficit - the year the deals were sealed. > > "For example, a new $100 million building is purchased or > built. Currently, that $100 million cost is charged as an expense the > year the facility is purchased. > > "Under accrual accounting, that same building which is > expected to last 40 years would be recorded as a $100 million asset and > depreciated by $2.5 million a year over its 40-year life." > > Sounds fine? Not quite. The writer or her source has hidden > something up their sleeve. No building sits in the air. It rests on > land, and land does not depreciate. On the contrary since most > government buildings are located in central spots in cities, the land > under them is likely to appreciate over the years. At times > immensely-urban real estate has been the basis of many great fortunes. > So why does the land go unmentioned in this plea for "good fiscal > management"? > > Moreover, restoring the brutal cuts in recent years of public > services would not be a spending spree. It would be an investment of the > soundest sort. > > "Mr. Desautels has argued for years that the capitalisation of > assets was critical to departments' 'management discipline' and their > 'accountability to Parliament.' For example, the manager of a government > laboratory never had to consider the cost of the space the lab occupied > or the equipment it used when determine the price-tag of its programs. > Mr. Desautels argues these figures become more critical with the > government's push to recover more of the costs from user fees. Without a > handle on costs it would be impossible for the government to determine > and justify the fees it charges." > > In short it is the push towards user fees that is an important > factor as the reason for this belated introduction of accrual > accountancy. But why is there no mention of the scams that the absence > of accrual accountancy invited? Since the value of government assets had > been written off to zero (land, buildings, and equipment) in year one, > they could be sold off at any price and a capital gain for the > government booked. And why was privatisation not delayed until > government assets (including land) had been appraised for the present > value and that entered on the books? > > William Krehm > Chairman, COMER > Editor-Publisher, Economic Reform > mailto:[EMAIL PROTECTED] > > ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > > > >Date: Thu, 14 Oct 1999 09:21:13 -0400 > >From: COMER <[EMAIL PROTECTED]> > >Organization: Committee on Monetary and Economic Reform > > > >ER9910-#1 Are We Missing a Heaven-sent Opportunity? > > > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > > Two months have come and gone since Conrad Black's National > >Post inexpensively scooped the other broadsheet Toronto papers, the CBC, > >indeed the Canadian media as a whole: it disclosed that the federal > >government had finally surrendered to the pressure of its auditor > >general and was introducing some elementary principles of accountancy > >into its ledgers. > > > > Black's opposition on this subject was highly scoopable. To > >the date of this writing, none of these has yet even mentioned this > >momentous event. Still more disturbing, apart from COMER we are not > >aware of other socially-minded organisations, political parties, or what > >have you even acknowledging this momentous event. That is a shame since, > >rather than just a dull detail of accountancy, it amounts to a > >confession by our government that for decades it has bilked the public > >in the name of a deficit that had no need to exist. > > > > The government itself set the standard of this hush-up. For > >some three decades that we were able to ascertain, the Canada Year Book > >carried a lucid description of how Ottawa calculated its deficit. In the > >1967 edition it appears on page 117, in the 1988 on page 22-6. Not a > >word is changed in the passage: "Fixed capital assets, such as > >government buildings and public works, are charged to budgetary > >expenditures at the time of acquisition or construction and are shown on > >the statement of assets and liabilities at a nominal value of $1.00." > > > > Suddenly we noted that in the 1997 issue that passage was > >longer there. Our efforts to find out when it was taken out and why came > >up against a stone wall. > > > > Under the date of August 25th, 1999, however, Mr. John Whitton > >of Statistics Canada, which publishes the Year Book, replied to Larry > >Farquharson of COMER on the matter as follows: 1) "Each Canada Year Book > >is very heavily revised from edition to edition." This clearly does not > >apply to the passage quoted above which we were able to trace without a > >single word changed for over a quarter of a century. 2) "The book > >includes information currently available, which is of interest to > >Canadians. It is not intended to give detailed information on subjects > >too complicated for understanding." That is an insult to Canadians. The > >enormity of writing off buildings and land, equipment, bridges, roads in > >a single year is no more "complicated for understanding" than the fact > >that in calculating her net worth, a citizen not only includes the > >mortgage on her house as a liability but the market value of the house > >as an asset to offset that debt. > > > > That a spokesman of Statistics Canada should dispense such > >nonsense gives the measure of the trouble this country is in. And of > >course, Mr. Whitton, who himself may have a mortgage on his home to keep > >in mind, is not the villain of this piece. Brian Mulroney set the > >pattern when in June 1991, Statcan's Economic Observer carried a paper > >showing that the growth of the government deficit was not due to > >increased program spending, but to a sharp increase in interest payments > >on the debt. Statcan was not only publicly reprimanded but had its > >budget slashed. (Meltdown, p. 60) > > > > No government would go in for such sleazy twisting of the > >facts without powerful reasons. The deficit produced by bad accountancy > >was the kingpin of the policy of redistributing the national income from > >the working and impoverished population to our financial institutions. > >Two panic buttons were crucial in making this possible -- inflation, and > >more recently the deficit. Entering the government's capital assets at > >$1 helped create both of these. Even the effort to pay off capital > >investments in a single year would necessitate more taxation than was > >strictly necessary. And taxation has been shifted from incomes to > >consumer goods and services. > > > > Secondly, to bail out our financial institutions from their > >harebrained gambles, massive amounts of federal debt was moved from the > >Bank of Canada to the private banks. When the Bank of Canada holds > >federal debt the interest paid on it returns to the Bank's sole > >shareholder, the Government of Canada. When the debt is held by the > >private banks that interest stays with them. That, in fact, along with > >the end of the cash reserve the banks had to leave with the central > >banks as a proportion of the deposits they received from the public, > >were the form of the bailout of our banks. Interest rates pushed skyward > >by the central bank in the early eighties account for most of the > >governments' debt. By these devices our banks have received not a > >one-time bailout, but an ongoing entitlement amounting to well over $5 > >billion annually. > > > > Though the talk of "level playing fields" in official > >releases, it was hardly a level playing field when the public sector > >entered its capital investments on its balance sheets at $1, while the > >banks were allowed to carry their speculative investments for the most > >part at their purchase prices, rather than at what they may have > >collapsed to on a swooning stock market. > > > > Why would Conrad Black spill the beans when his competitors > >kept mum? > > > > A couple of reasons come to mind. The main one is that he is > >desperately in need of readers for his National Post. Secondly, > >temperamentally he is not indisposed to thumb his nose at governments, > >particularly this government. Besides the deal the Finance Minister > >Martin obviously struck with the Auditor-General had lightened the > >burden of prevarication that the scooper would have to assume. A clue to > >what must have taken place behind closed doors appeared in a front page > >article in The Bottom Line (14/05), a journal for accountants: > >'[Auditor-General] Desautels Seeks Peace with Finance.' After qualifying > >his opinion of the federal accounts for the past two years, a more > >conciliatory Auditor-General Denis Desautels has hinted that he has > >buried the hatchet with Finance and will likely approve the books for > >the 1998-9 fiscal year." > > > > Not only was the writer of the Post article able to cite the > >Reform Party chair of the Public Accounts committee to the effect that > >the $50 billion dollars of assets that have suddenly turned up on the > >government's balance sheet, "This isn't an extra $50 billion to go > >shopping with. These are assets bought and paid for in the past. It's > >like finding another car in the garage -- you don't go out on a spending > >spree unless you sell that car." That sort of nonsense one would expect > >from the Reform Party. But the author quotes the Auditor-General himself > >warning "this won't change Canada's financial position." It is > >incredible that anyone with an accounting degree, let alone the > >Auditor-General would utter such twaddle, unless he were under duress -- > >the terms of his deal with the government referred to by The Bottom > >Line. One of the two basic criteria for judging a firm's financial > >position is the comparison of its assets and its debt. Having $50 > >billion more assets suddenly turn up on the government's balance sheet > >will make it possible not only to borrow more money at a lower rate of > >interest, but more to the point, have the Bank of Canada create more > >credit for the government (and the chartered banks less). > > > > Instead, we read in The Post article, "Mr. Desautels has > >argued for years that the capitalisation of assets was critical to > >departments' "management discipline" and their "accountability to > >Parliament. For example the manager of the space the lab occupied or the > >equipment it used when determining the price tags of the programs. Mr. > >Desautels argues these figures become more critical with the > >government's push to recover more the costs from user fees." > > > > User fees then is the name of one of the games. Another is > >undoubtedly the likelihood of the next bailout of our sporting banks. > >Ever deeply into the stock market, our banks are exposed to the full > >blast of the storm in the offing. When it blows in, it will require > >oodles of government cash to make them whole again. And with their > >reserve requirement reduced to zero and nowhere to go along that path, > >it has become necessary for Ottawa to clean shop for taking on massively > >increased debt. This, as last time, will be borrowed from the very banks > >that it will be pulling out of the water. > > > > But if we can reconstruct the motives of the government, the > >lack of response of socially-concerned organisations leaves us aghast. > >Have they accepted officialdom's dumbed-down appraisal of the public's > >intelligence? Do they feel that even with the help of the innumerable > >academics, lawyers and other professionals in their ranks, it is beyond > >their capacity to explain to the average citizen what is essentially the > >same arrangement that underlies mortgages? Or is it a curse laid on by > >some malignant god that socially-minded organisations lack the power to > >forestall injustices, and can only bleat about those already inflicted? > > > > We refer our readers to the crushing price paid for the > >acceptance of just this sort of dumbed-downness in 1931 by the Socialist > >and democratic leaders in Germany. > > > > The timing of Ottawa's semi-conspiratorial self-confession > >seems planned in heaven. In the G&M (6/10) John Ibbitson ('Ontario plots > >radical spending reforms') informs us that the government of Canada's > >wealthiest province is "secretly planning a powerful new agency as it > >seeks a solution to a $30 billion shortfall in infrastructure project > >funding. The new Superbuild Agency according to confidential documents > >obtained by the G&M will evaluate all proposals for capital spending > >projects, such as roads, schools, health-care facilities and university > >research labs. It will search aggressively for private-sector capital to > >help build this desperately needed new infrastructure and take > >'calculated political and economic risks' at forging innovative new > >private-public sector partnerships." > > > > "In his last May budget Finance Minister Ernie Eves announced > >a five-year $20 billion Superbuild infrastructure fund to be divided > >evenly between public money and private investors who would be invited > >to help build and profit from new schools, roads and health-care > >facilities." > > > > The writer remarks, "In fact, the province's needs are far > >more pressing. A government document outlining the rationale and mandate > >of the new agency reports: 'Ministry of Finance estimates public capital > >investment needs of approx. $40 billion over the next five years, and > >even this does not include any capital investment to address the > >accumulated infrastructure deficit." > > > > The interesting point is that Ontario, like most of our > >provinces, still has no capital budgeting.1 It enters its acquisitions > >of buildings roads etc. at a nominal one dollar. It has been the > >time-honoured practice for the Finance Ministry each year to send its > >representatives to the bond-rating agencies in the US to explain to them > >that this and that large expenditure entered on its books at $1.00 was > >in fact a capital investment that will yield benefits to the province > >for many years. Unfortunately, it provided no such explanations to its > >own citizens. > > > > Under such circumstances massive programs of privatisation can > >only be questionable -- the government itself has only the vaguest > >notion of the cost or value of assets it may be privatising. > > > > And this is a time when the truth about privatisation is > >surfacing. For example, the preliminary reports of what went wrong in > >Britain's Paddington train disaster highlight the disorganisation > >arising from the fractured responsibility for railway safety of the > >multiple privateers who acquired them. > > > > The Bank of Canada Act still has article 18 (c) that reads > >"The Bank may buy and sell securities issued or guaranteed by Canada or > >any province." That makes it possible for Ontario, instead of financing > >the rehabilitation of Ontario's neglected infrastructures with private > >institutions, to do so at the BoC. Since Ontario is not a shareholder of > >the Bank the interest on such debt would go not to it directly, but to > >the federal government. However, such an arrangement would open up > >unsuspected possibilities for collaboration between the two levels of > >government. Applied to Quebec and other provinces it would do more to > >buttress the country's unity, than a dozen constitutional conferences. > >In return for remitting to Ontario part of the money originating in the > >interest on the Ontario bonds held by the BoC agreement can had on the > >standards of the new projects. > > > > This is a time when every socially-concerned organisation must > >be heard on the possibilities created by the belated arrival of serious > >accountancy to Ottawa. > > > >1 Capital budgeting is also known as accrual accountancy. > > > >William Krehm > >Chairman, COMER > >Editor-Publisher, Economic Reform > >mailto:[EMAIL PROTECTED] > > > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > >Copyright (C) 1999 COMER. May be reproduced with proper acknowledgement. > > > >"Economic Reform" is the monthly journal of the Committee on Monetary > >and Economic Reform (COMER), a Canada-based publishing think-tank. > >Annual subscription, 12 issues, is $30. > > > >COMER Publications > >Suite 107 > >245 Carlaw Avenue > >Toronto ON M4M 2S6 > >Telephone (416) 466-2642 > >Fax 466-5827 > > > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > >COMER Publications > >presents a publishing milestone > > > >10 Years > >100 Issues > >and > >1,000,000 Words > >of monetary and economic reform commentary, now brought together in a > >definitive collection of selected critical articles from Economic > >Reform, COMER's monthly journal. > > > >MELTDOWN : money, debt and the wealth of nations : how zero inflation > >policy and deregulation have turned the world economy into a global > >casino : as documented in the first decade of Economic Reform > > > >(The John Hotson memorial series) > > > >Includes bibliographical references and index. > > > >ISBN 0-9680681-2-X > >400 pages > >6X9 SC > > > >"Over the past decade COMER has been one of the most insightful and > >provocative voices on economic policy. The late John Hotson, William > >Krehm, Bill Hixson, Harry Pope, Lynn Turgeon, John McMurtry and other > >like minded economists and economic reformers have supplied a steady > >stream of trenchant criticism and imaginative policy proposals as a > >refreshing alternative to the monetarist dogma that has gripped our > >central banks and governments. > > "Economic policy is simply too important to our well being to > >be restricted to professional neo-classical economists who have turned a > >blind eye to our contemporary malaise. Meltdown offers an excellent > >collection of alternative views which merits serious consideration as > >opposed to smug dismissal." > >Harold Chorney > >Professor of Public Policy and Economics > >Concordia University > >Montreal, PQ > > > >. To order a copy of MELTDOWN, send $25 + $5 postage and handling ($30) > >to: > > > >COMER Publications > >Suite 107 > >245 Carlaw Avenue > >Toronto ON M4M 2S6 > > > >Qualified individuals (academic, media, etc.) may request a > >complimentary copy by writing the request on letterhead, and please > >enclose [$5 within North America | $10 International] to help defray > >shipping costs. > > > >Please contact COMER for orders greater than 5 copies. > > > >Credit card orders may be placed at http://www.chapters.ca. > > > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > >Back issues of Economic Reform are available for $1 per issue plus > >postage of $2 for multiples up to 5 copies, from > >Robert Good > >R.R. 2 > >Puslinch, ON N0B 2J0 > >~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ > > > > > > > > > Silver Donald Cameron > D'Escousse, NS B0E 1K0 > (902)226-3165 fax (902)226-1904 > > Home page: http://islemadame.com/sdc/ > Weekly columns: http://www.onelist.com/subscribe/sdcns > Summer rentals: http://cyberrentals.com/CAN/CameCAN.html > > THE LIVING BEACH (Macmillan Canada, 1998) > * Winner of the Evelyn Richardson Award , and now in paperback > >