Opinion: We need to hear the leaders debate debts and deficits

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The total debt of the federal government, also known as its gross debt, is expected to exceed $2 trillion by 2024-25, up from $1.3 trillion in 2019-20. This projection doesn’t include any new spending the major parties are proposing during the campaign, which likely means even more debt. As Canadians weigh their electoral decisions, they should seriously consider the issue of debt and deficits.

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The deterioration of the federal government’s long-term finances in recent years has been rapid and considerable. In 2018, the last time the Department of Finance released a long-term analysis, it expected Ottawa to remain in deficit until 2040 given expectations for economic growth and the government spending and tax policies then in place.

More recently, the Parliamentary Budget Officer (PBO) released an analysis of Ottawa’s long-term finances and concluded that, absent change in spending and tax policies, the federal budget would not balance until 2070. In fact, given the dire state of business investment, declining rates of economic growth and the lack of spending discipline in any political party’s campaign platforms, the PBO’s forecast of a balanced budget in 2070 may well be optimistic.

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The risks to federal finances are immediate, even before factoring in any new spending. In a recent analysis co-written with our colleague Milagros Palacios, we calculated that federal interest payments would increase by 59.4 per cent ($13.1 billion) if interest costs returned to their 2019-20 levels, which were near historic lows.

Given the rise in inflation and the comparative increase in the riskiness of Canadian debt — as a proportion of GDP we have the fifth-highest total government debt among 29 industrialized countries — it’s not hard to imagine nominal interest costs increasing in the near term. A rise in these costs would further erode federal finances and increase the deficit, expected to reach $154.7 billion this year and nearly $60.0 billion next year, again before factoring in campaign-related spending promises.

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It’s also important to understand the nature of the debt Ottawa is accumulating. There are times when debt finance is appropriate. When a government builds an asset such as a bridge or highway that will be used over time, it’s entirely appropriate to spread the cost over the asset’s life, so the people using it actually pay for it.

It’s also appropriate for governments to borrow during recessions as tax revenues decline and spending rises, particularly on programs such as employment insurance (EI) that are sensitive to the state of the economy. The flip side, however, is that government should pay off this cyclical debt — debt arising from the ebbs and flows of the economy — when the economy recovers.

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But very little of the current deficit-financed spending of the federal government falls under the category of projects such as bridges and highways. And the budget deficits forecast into the future are a result, not of cyclical factors, but of Ottawa’s refusal to impose current taxes to finance current spending. Federal politicians of all stripes have decided it’s easier to spend today and defer the cost of that spending to future generations by borrowing.

Accumulating debt to finance current spending has both short- and long-term economic and financial implications. It also raises important questions of intergenerational equity. All this should at least be discussed during the current election campaign so Canadians can make informed decisions when voting.

Jason Clemens and Jake Fuss are economists with the Fraser Institute.