Sooner or later, we will pay for federal spending

Trudeau isn’t saying no new taxes; he’s saying we should continue to spend today and pay for it with taxes tomorrow

By Tegan Hill
and Jake Fuss
The Fraser Institute

Despite promising significant increases to already historically high spending, Prime Minister Justin Trudeau recently pledged there will be no new taxes. This rhetoric is simply false.

Tegan Hill
Tegan Hill

To pay for today’s spending, the Liberal government must either tax today or defer tax increases to the future by borrowing (i.e. more debt). Trudeau isn’t saying no new taxes; he’s saying we should continue to spend today and pay for it with taxes tomorrow.

According to the federal government’s recent fiscal “snapshot,” Ottawa will run a $343-billion budget deficit this year, which means it will spend $343 billion more than it collects in revenue – by far the largest amount in nominal terms in Canadian history.

Due to new spending commitments, it’s likely the deficit will be even larger. Of course, annual deficits accumulate and increase government debt. Indeed, the federal government’s aggregate debt level will now eclipse $1 trillion.

And all indications suggest the accumulation of debt will not stop any time soon. According to recent announcements, the government will spend $37 billion on extending CERB and modifying employment insurance provisions, while billions in new spending for ‘green’ infrastructure and universal pharmacare could be coming soon.

jake fuss Fraser
Jake Fuss

Canadians ultimately bear the burden of this spending, either through taxes today or debt-interest costs tomorrow. Even with historically low interest rates, interest costs will consume an estimated $19.5 billion this year. That’s about what the federal government spends on employment insurance in a typical year.

While the government tried to temper the concerns of Canadians by stating it will lock in historically low interest rates to manage its debt costs, in reality, it’s basically saying it expects interest rates will increase over the next few years.

This should raise major concerns. As our colleagues point out, even a small increase in interest rates would significantly increase the cost of federal debt. Their analysis shows that if debt-interest costs returned to 2019-20 levels, current debt-interest costs would almost double, increasing from $19.5 billion to $36.2 billion. If interest costs were slightly higher – around 2010-11 levels – debt costs would increase to $54.5 billion, nearly triple the current cost.

Thanks to compounding interest, even a small increase in debt-interest costs could increase deficits for the foreseeable future.

Larger deficits generally lead to higher interest costs, which lead to higher deficits, which mean higher interest costs and so on. This cycle led to a near debt and currency crisis in the 1990s when federal debt-interest costs peaked at $49.4 billion (or 35.2 per cent of government revenues).

This government is essentially preparing for more debt accumulation and higher interest costs, while counting on Canadians to foot the bill at some point in the future.

Canadians shouldn’t be fooled – they will eventually pay for today’s spending through taxes. The only question is when.

Tegan Hill and Jake Fuss are economists with the Fraser Institute.

Tegan and Jake are Troy Media Thought Leaders. Why aren’t you?

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