Here is a question to seriously think about – do you think that your five-year-old child should pay to attend their own school? But since your child can’t afford it yet, don’t worry, we’ll just keep the bill and charge interest until they can.
If you said yes, then you will love Jim Prentice for leader of the PC Party and premier of Alberta.
At a recent Chamber of Commerce breakfast in Calgary, Prentice said he wants the province to borrow money to build new schools.
Borrowing for capital projects is no different than having your child take on debt themselves so they can pay it back plus interest when they are adults.
You will hear things on how businesses and home owners take on debt and mortgages but don’t be fooled by the accounting trick that politicians are too often using these days.
Business owners take on debt for expansion in order to generate more revenue and build equity that eventually can be sold.
Homeowners also are building equity that can eventually be sold.
What equity does the government plan on selling? What income is the government plan on generating by this borrowing?
Interest rates are traditionally charged at a larger rate than inflation, which is how banks make money.
This means that if the government waited and saved instead of borrowing, and the price to build went up, it would actually be cheaper to buy it with the savings then it would be to borrow and buy it now because inflation is lower than the cost of borrowing.
The only true reason governments borrow for capital spending is to get votes today. There is no planning involved and there is no financial management thought out. It is completely driven by the need for votes, plain and simple.
Do I want my five-year-old to take on debt today so she can pay for it as an adult (plus interest)?
Simple answer – no.
Cory G. Litzenberger