The cost of government debt in Canada

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Appeared in the Globe and Mail, January 12, 2016

As a new year begins and Canadian governments prepare their budgets, it’s a good time to reflect on the state of government indebtedness in the country. Unfortunately, it’s not a pretty picture. Governments have amassed considerable new debt over the past eight years, with tangible and immediate consequences for Canadians.

After reducing debt from the mid-1990s to late-2000s, Canadian governments reversed course in 2008/09, as many turned to deficit-financed spending in hopes of stimulating the economy after the recent recession.

Although economic research casts serious doubt on the effectiveness of efforts to stimulate the economy in this way, we are nearly seven years past the recession and governments continue to spend more than the revenues they collect while digging deeper into debt. This year, the federal government and eight of 10 provinces are projecting operating deficits.

Since 2007/08, combined federal and provincial government debt has grown over $450 billion, from $834 billion to $1.3 trillion. Federal-provincial debt now equals approximately 65 per cent of the Canadian economy and represents $35,827 for every man, woman and child living in Canada.

With the federal government and several provinces planning ongoing deficits and significant debt-financed capital spending, the growth in debt is unlikely to halt anytime soon.

But there are consequences to increasing debt.

Governments must make interest payments on their debt similar to families who pay interest on borrowing for mortgages, vehicles or credit card spending. Some Canadian governments, including the federal, Ontario and Quebec governments, now spend between nine and 10 cents of every revenue dollar they collect simply to service existing debt.

These interest payments leave fewer resources available for important priorities such as tax relief and spending on public programs such as health care, education and social services.

Consider the following examples from Canada’s two largest governments whose interest payments are now comparable to key spending initiatives.

In 2015/16, interest payments on the federal debt are expected to total $25.9 billion, which is more than the Department of National Defence’s entire budget ($23.9 billion) and the $19.3 billion to be spent on Employment Insurance benefits this year.

In Ontario, the government expects to spend $11.3 billion on interest payments—more than the entire $11.1 billion budget for the Ministry of Community and Social Services and close to the $11.9 billion being spent on infrastructure (roads, hospitals, schools, etc.).

Unfortunately for Ontarians, interest payments on the debt will continue to eat up a growing portion of the province’s budget. The government’s latest projections show debt interest payments growing at an average annual rate of 6.7 per cent over the next three years—much faster than spending growth rates for health (1.8 per cent) and education (0.3 per cent).

Collectively the story is equally sobering. All Canadian governments cumulatively spent $60.8 billion on interest payments in 2014/15, more than spending on pension benefits through the Canada and Quebec Pension Plans ($50.9 billion) and close to all spending on K-12 public education ($62.2 billion as of 2012/13, the latest year of available data).

Importantly, these substantial interest payments exist despite historically low interest rates. If interest rates rise, the cost of government borrowing will go up as well. Governments that carry large debt burdens (such as Ontario and Quebec) are particularly vulnerable to interest rate hikes.

Bottom line: deficit spending and growing government debt have costs. Rising government debt can result in more resources going to interest payments and not public priorities that benefit Canadian families or improve the country’s economic competitiveness. Now is a good time to reverse the trend and rein in government debt.

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