Let’s pretend you want to buy a car for $50,000, but you only have savings of $20,000, so you will need to finance the other $30,000.
Now, let’s assume the savings were accumulated from your previous after-tax earnings since your cumulative household expenses were less than your cumulative earnings, and that the interest-bearing financing can be obtained from a bank or other lender, often through a vehicle manufacturer’s factory financing arrangements.
If you understand the above example, then you understand the basic accounting equation that was developed more than 500 years ago: assets equal liabilities plus equity. In other words, assets are always acquired with equity (accumulated net earnings) or liabilities.
In the business context, equity can also include shares or other instruments issued for money, but individuals and governments do not have an equivalent concept.
In the above example, the asset is the $50,000 car and it was acquired with equity of $20,000 and new debt of $30,000. Easy to understand.
With that in mind, I couldn’t help but take issue with
Mark Carney’s
marketing phrase, “Spend less, invest more.” He even put out an elementary-level video to try to explain that
simple expenditures
(such as utilities for your home) have no lingering benefit, whereas a house purchase does and is thus an asset. Good grief.
Expenditures are part of calculating equity. In other words, if your current expenses are less than your current income, then you can accumulate savings and/or equity. If your expenses exceed your income, you have a deficit and you need to find a way to pay for those expenses (usually debt, or you can use any existing equity or savings).
Got it so far? Good. You will therefore understand that recharacterizing spending as expenditures or investments is an old, misleading marketing gimmick since it conveniently ignores how such overall spending (whether it is expenditures or investments) will be paid for.
If you want to recharacterize expenditures to assets, well, OK. But that ignores the other side of the accounting equation. How will it be paid for? In a government context, the answer is easy. If current taxation revenues don’t keep up with such expenses or investments, then debt will increase.
Earlier this year, Carney said he would change the way that
government budgets
are reported by separating them into operating expenses and capital. This is a
deceptive style of reporting
. If a government is paying for operating expenses or capital, it had better have cumulative or current net earnings. If not, it will acquire such assets or pay for operating expenditures with debt.
Accordingly, ask yourself if the “spend less, invest more” phrase makes sense. If it does, you’ve invented a new accounting equation and should write accounting textbooks for a living.
Spending and investing in the government context only deal with one side of the accounting equation. In other words, regardless of whether an amount is an expenditure or an investment, it, again, needs to be financed with current net revenues — current government revenues need to exceed current expenditures — or new debt.
The Liberal government has had 10 years of
continuous deficits
. This means to fund investments, more liabilities and debt were accumulated.
The Liberals on Saturday released a “
” should they be elected. To be clear, this was definitely not a plan. It was a vague Excel spreadsheet with the strategic depth of a grocery list.
What was clear, however, was that the spending initiatives are massive. Carney wants to implement more than $130 billion in new spending, dressed up in the familiar costume of investments and capital. That is a staggering sum bordering on fiscal insanity that will leave our next generations saddled with crippling debt.
How will all this new spending be paid for, regardless of whether or not you separate the operational spending from the investment spending? New debt and new revenues, of course.
Which means new and/or increased taxes
. That simply follows the basic accounting equation.
What could those new taxes be? Hard to say, but carbon taxes of all kinds are likely. Increased personal taxes, too, despite the small carrot that Carney has offered during the election to reduce the lower personal tax bracket by one per cent. Wealth taxes? Home equity tax? Reduced principal residence exemptions? Increased capital gains taxes despite rolling them back as an election promise? Increased corporate taxes?
One thing is for sure: the Liberals have
no interest in tax reform
. They have had 10 years to make positive and very necessary tax changes for Canada with no uptake despite significant calls from the tax, business and economic community. Carney hasn’t offered a single substantive word on tax reform except to say that people and corporations need to pay their fair share — a vacuous phrase that means nothing.
The
April 28 election
is just days away, so Canadians need to decide: Do we want a government that respects basic fiscal principles or one that needs a remedial accounting course?
Calling every expense an investment doesn’t change the math, just like calling a donut a “carbohydrate-rich wellness circle” doesn’t make it healthy.
As Warren Buffett wisely once said, “Only when the tide goes out do you discover who’s been swimming naked.”
We’ll see exactly how these so-called investments are funded — mounting debt and, inevitably, higher taxes — when the tide goes out on them. If we keep buying what the Liberals are selling, the next generation will be left holding the receipt, the tax bill and a pile of IOUs they never agreed to.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at
and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.
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