Politics and Public Debt: The Dominion, the Banks, and Alberta's Social Credit
Book by University of Alberta Press, 1999

PREFACE
MY INTEREST IN THE STUDY OF PUBLIC FINANCE BEGAN IN THE MID- 1970S while I was a junior auditor with the Office of the Auditor General of Canada. It was during this period that the beginning of the public debt build-up began. Between 1945 and 1975, federal public debt had grown negligibly, and, as a percentage of gross domestic product, the public debt was a mere blip on the radar scene of Canadian public finance. This would soon change and with it the character of the debate on public debt. But this debate did not really commence for another decade. What tweaked my intellectual interest in the subject was the near religious views of economists that the public debt was not an issue. In fact, in those days there seemed to be a view that public debts hardly mattered at all.

When I began my research on politics, public debt and debt management in the early 1980s, I found a general indifference or bemusement about the subject of public debt and a lack of questioning as to the implications of growing debt on the political system. The issue was, and remains today, largely a nonissue for political scientists, with certain exceptions. 1 With the stratospheric interest rates witnessed in the early 1980s and stratospheric deficits arising from the "Volcker induced" recession, seminars on government deficits and debts became fashionable. During the early to mid 1980s academic opinion tended to be divided whereas the opinion of the financial press and most business economists was almost universal in condemning the continuing failure of the federal government to rein in their deficits. 2 By the early 1990s, the issue of public debts and deficits was no longer a matter for government technicians and investment bankers, the subject was now on the top of every government's agenda in this country.

By 1994, Canadian taxpayers and Canadian and foreign financial communities had finally discovered the magnitude and policy implications of the federal and provincial governments' deficits and accumulated debts. At that time, one frequently heard utterances from "think tanks," provincial politicians and officials that federal and provincial deficits were reaching "crisis" proportions. 3 In March, 1993 Premier Clyde Wells of Newfoundland spoke of the need for managing provincial finances "in a manner that will not jeopardize our credit rating." 4 That April the International Monetary Fund warned that Canadian governments' deficits will push Canada's external debts "to levels that could have increasingly negative effects on market conditions." 5 In the fall of 1993, it was also reported that federal officials were quietly canvassing the country's financial community about contingency plans for provinces in the event that they could no longer refinance their maturing debt. 6 In December 1993, comments attributed to a senior official of Standard & Poor's suggested that "tough measures" by the provinces were needed to avoid a downgrading. 7 In February 1995, a few weeks before the federal government's budget was to be introduced, Moody's Investors Services announced that it had put the Government of Canada's debt on review for a possible downgrade, a downgrade which was confirmed that April. 8 During that 1994-95 period, similar reports, which would have been unthinkable a decade before, discussed openly stories about foreign investment counsel recommending to their well-heeled clients reductions in their "exposure" to Canada.

During the period from 1982 to May 1998, credit rating agencies ( Moody's, Standard & Poor's, Canadian Bond Rating Service, and Dominion Bond Rating Service) downgraded the provinces' ratings 65 times with upgrades occurring 14 times. From 1993 until 1998, the Government of Canada had been downgraded at least once by major agencies and twice in the case of Moody's. At present, there are no provincial credits that enjoy the coveted triple "A" rating and the federal government's foreign debt is not rated "AAA" by any major Canadian and U.S. rating agencies. Clearly government policy-makers are coming under increasing pressure from the media and financial community to do something about the rising public debt. The emergence of deficit reduction and debt repayment in the mid to late 1990s illustrates the impact of capital markets on government policies. The resistance of finance capital to the financing of ever-expanding public debt by raising the cost of borrowing to governments accounts in significant measure for the emergence of the "neo-conservative," market-based fiscal and economic policies.