Two belt tightening families: Which one looks most like government?

Families, it is said, have to tighten their belts in tough times. Some think that government should do the same. Countries like Canada and the United States, like almost all rich countries, borrow money. In some ways, the lure of being able to raise capital is why they became countries in the first place. Once a land becomes a legal entity, it creates a currency and it is able to invest in its future. Growth begins with new investment.

People do the same thing – they borrow to buy a home and to become educated to make the money that they intend to pay back. Once repaid and the family realizes its potential, a family becomes prosperous. It owes little or nothing and uses its resources to loan to others: governments through savings bonds, companies through stock issuances or to family members to help them prosper.

But here is where the comparison ends. Countries (provinces and states) do not necessarily prosper when they use their resources to pay back debt and become debt free. A country or a province cannot say “Let’s pay down the debt to the exclusion of investment in infrastructure, education, services, and health”. If it does so, the country will cease to grow. Its capacity to grow will be curtailed and it will find it harder to prosper.

While families nurture and grow within the context of a wider economy, countries and their economies must own their economies.

If a family has high debt and tightens its belt, its prospects may be better as long as it only gives up the things that it does not need to grow and prosper. However, if the family sells the family home or decides not to pay educational or health costs, it will likely not prosper despite its concentration on paying back debt.

Regardless, a family that tightens its belt still does so within a larger economic context that will not change because of the change in course of one family. By tightening its belt, the value of the national currency will not change, they will not put a member of their family out of work and the family’s basic infrastructure will not deteriorate.

But governments and their economies are inextricably intertwined.  Belt tightening does change currencies, erode infrastructure and put people out of work. Payment of debt by governments and families is not the same thing. The implications for government are far more complex and difficult.

A Tale of Two Families

So families and governments may not be alike but that doesn’t stop us from using the family analogue. So which family do governments emulate? Is it family number one or family number two?

When we think of the good family – let’s call them family number one – it’s the one we want to be the role model for government.  We tend to think of this family as the one that tightens its belt by giving up a vacation or the purchase of a big-screen TV.  Similarly, the good government associated with family number one gives up large new discretionary purchases.

We envision family number one trading in the big car and buying a smaller car – eating more meals at home. Equally, we see good government making prudent use of existing resources when times are tough when belt-tightening is the order of the day.

The good family saves for their children’s education while ensuring the mortgage and other bills are paid.  The equally good government ensures that educational opportunity is affordable and does not raise tuition fees or erode educational programs in favour of discretionary spending.

Family members in family number one seek other forms of revenue. Members work extra hours when they can or take on part time work in order to realize greater revenue to pay for the necessities. Similarly, a good government in parallel finds new ways of raising revenues. It works hard to raise the money for investments while borrowing judiciously.

But family number two sees things differently. Members see the vacation and the big TV as necessities.  They tighten their belts by downsizing the children’s education fund along with the parents’ retirement savings. They buy a new car and sell the family home in favour of renting. Instead of attempting to obtain new sources of revenue through work or other means, they go out of their way to reduce their income as they perceive the need for less income for their newly reduced requirements.

Family number two is decidedly not the standard belt-tightening family.  But we must ask which of the two “belt-tightening families” we want Government to emulate.

Interestingly, our right-of-centre governments act like family number two. They sell off or privatize assets owned collectively by the people (the equivalent of selling the family home and renting).   They preside over increased tuition fees (the same as cancelling the education fund) and reduce the reach of income security programs (like the family cashing-in their RRSP). They   make retiring a more precarious proposition (by allowing retirement protections to erode).

And in the case of the present government of Canada,  just like belt tightening family number two – the one that refused to give up the vacation and the TV – F35 jets  remain on the ‘must have’ list.

Progressive governments in the past tended to act more like belt-tightening family number one. They raised revenues, canceled the baubles, ensured that collectively owned resources stayed in Canadian hands, prioritized education and tended to have a better fiscal hand on government.

So even if some people want governments to tighten their belts just like hard working families, they just might not belt- tighten like the family you thought!