Ottawa and the provinces have a big debt problem

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Appeared in the Globe and Mail, January 16, 2020
Ottawa and the provinces have a big debt problem

Governments across Canada will soon unveil their tax and spending plans in their 2020 budgets. This year’s budget season provides an opportunity for the federal and provincial governments to reverse the trend of debt accumulation we’ve seen for more than a decade.

Since 2007/08, combined federal and provincial government net debt (gross debt minus financial liabilities) has grown from $837.0 billion to $1.5 trillion—an increase of nearly $650 billion in 12 years—due largely to increased government spending. Put differently, today’s federal-provincial net debt breaks down to $39,483 of government debt for every man, woman and child in Canada.

While nominal federal and provincial debt levels rose in every province between 2007/08 and 2019/20, Canadians face different debt burdens depending on where they live. Provincial debt levels vary widely, and the federal debt burden is unevenly distributed among provinces.

So, who are the most government-debt-ridden Canadians?

As noted in a new Fraser Institute study, Newfoundland and Labrador has the highest per-person combined (provincial and federal) government debt among the provinces. Each Newfoundland resident currently bears $48,478 in government debt. Ontario ranks a close second with a $45,891 combined government debt burden.

The debt-to-GDP ratio (a measure that compares debt to the size of the overall economy) is another way to compare government debt between provinces and evaluate the sustainability of debt accumulation. Under this measure, Ontario has the highest combined debt burden at 75.4 per cent of the economy followed by Newfoundland and Labrador at 73.6 per cent.

Nationally, the combined federal-provincial net debt-to-GDP ratio in Canada is projected to climb from 53.1 per cent in 2007/08 to 64.3 per cent in 2019/20. And this growth is likely to continue in the future.

Moreover, Canada’s aging population will put upward pressure on health-care costs, which may well cause further increases in federal and provincial debt burdens now and in the future. A higher proportion of Canadians over the age of 65 will prompt more spending on health care and seniors’ benefits, contributing to larger budget deficits and more debt.

In fact, without any policy changes, current projections from the Department of Finance suggest the federal government will not balance its budget until 2040, while several provinces look likely to continue racking up debt for the foreseeable future.

But what are the consequences of all this growing government debt?

For starters, governments must pay interest on their debt just like households must pay interest on mortgages, vehicle purchases and credit cards. Taken together, the federal and provincial governments currently spend almost $55 billion in annual interest payments, which leaves fewer resources for tax cuts or government programs such as health care, education and social services.

Growing government debt can also negatively affect economic growth and productivity. For example, large increases in government debt can lead to rising interest rates. The resulting higher borrowing costs then hinder productivity by reducing the incentive for private capital investment.

Ultimately, growing government debt not only burdens current taxpayers, but future generations of Canadians who will repay the debt and cover the interest payments, potentially through higher taxes. And these higher-than-anticipated taxes could also hamper future economic performance and the ability of provinces to compete with one another—and other jurisdictions worldwide—for business investment and high-skilled workers.

Clearly, rising government debt has negative consequences for Canadians, as resources flow towards interest payments and away from public priorities that help families or improve Canada’s economic competitiveness. This coming budget season, Ottawa and the provinces have an opportunity to reduce the burden on taxpayers by better controlling government spending—the first and most important step in addressing our growing debt problem.