The current government of New Brunswick is attempting to manage the provincial debt in two ways: cutting expenditures and increasing taxes.
Neither of these approaches is likely to offer a solution to the problem of the province’s externally held debt. It is difficult to see how cutting expenditures and increasing taxes can be employed on a scale that effectively addresses this problem.
What about economic growth? Despite the efforts of the current government and the one before it to boost growth, is there any good reason to think an economic boom will soon provide government with the means needed to reduce and eliminate the externally held provincial debt?
At most, the annual deficit may be reduced. The debt will remain. But, if this externally held debt is not eliminated, or at least significantly reduced, government will remain at the mercy of the bond rating agencies and continue to send millions of taxpayer’s dollars out of the province in interest payments – millions of dollars that could and should be used in NB.
Is this externally held debt a permanent feature of government? Under current fiscal arrangements, this seems to be the case. A perpetual flow of interest payments to the commercial financial industry is the logical result of the way the current monetary system is structured.
But shouldn’t a responsible government wish to eliminate externally held debt, or at least significantly reduce it? Shouldn’t it wish to keep its tax revenue circulating within its own jurisdiction for the benefit of the public interest?
If so, then why is the NB government borrowing from the commercial financial industry? And why is the government of Canada doing the same? It’s not that the private financial industry is the only source of credit.
For example, from 1938 to 1974, the government of Canada borrowed at low to zero interest rates from its own bank – the Bank of Canada. This in-house banking arrangement helped address the Great Depression, finance Canada’s participation in World War Two, benefit provinces and municipalities, and create postwar prosperity.
Why then are governments now in debt to the private financial industry? The answer to this question is in the history of federal government policy and the sidelining of the Bank of Canada since 1974. (See Borrowing Trouble: Why not use the Bank of Canada to carry government debt? by Richard Priestman)
Is there any intrinsic or inevitable reason for governments to borrow from the private, for-profit financial system? The answer is, “No.” How can governments get clear of externally held debt? The answer is – public banking.
The public banking alternative for public fiscal management is well understood and is increasingly being put into place in various jurisdictions worldwide. For Canada, it would entail the restoration of the Bank of Canada to its original role. Or, for NB, it could be the establishment of a public, provincial bank.
In brief, public banking works like this: Government establishes a public bank for the purpose of receiving all government revenue, making all government disbursements, and handling all government financial arrangements, including borrowing for deficit financing when needed. Interest on borrowed money remains within the jurisdiction of the bank and, after covering administrative costs, is returned to government as a dividend.
The public banking alternative offers government a way to stop the loss of public money by reducing and eliminating its indebtedness to the private financial system. The public banking alternative offers government a secure way of conducting all its financial activities, including borrowing when needed, within the framework of a public trust institution operated in the public interest. (See Public Banking Institute)
A public bank is like a credit union for the government. The government owns the public bank in the same way members own their credit union. In both cases the sole purpose of the institution is to serve its owners. In the case of the credit union, it serves the personal interests of its member-owners. In the case of the public bank, it serves the public interests of its government-owner.
To make the case concrete, consider the state of North Dakota, which established a public bank in 1919 to handle all government finances. A century later it remains a singular success story in the field of public banking. Due to its public bank, North Dakota was the only state in the US not adversely affected by the 2008-2010 financial crisis.
North Dakota and New Brunswick have the same size populations and both struggle with downscale economies. The big difference is that the government of North Dakota is in complete control of its fiscal affairs. It carries no external debt load that requires sending tax dollars to the private financial industry.
With a public bank, the government of NB could begin to eliminate external debt, recoup millions of tax dollars for provincial use, and start down the road toward fiscal stability. A public bank is not a silver bullet, but it would be an effective tool for upgrading and advancing government stewardship of the public purse.
Keith Helmuth is member of the Woodstock Sustainable Energy Group
January 2016