Charles Lammam, Ben Eisen and Milagros Palacios are analysts with the Fraser Institute.
As a new year unfolds and Canadian governments prepare their budgets, it's a good time to reflect on the state of government indebtedness in this 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 recession.
Although economic research casts serious doubt on the effectiveness of such efforts, we are nearly seven years past the recession and governments continue to spend more than the revenue they collect, while digging deeper into debt. This year, the federal government and eight provinces are projecting operating deficits.
Since 2007-08, combined federal and provincial government debt has grown by more than $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.
This growth in debt is unlikely to halt any time soon. But it comes with consequences.
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 9 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 and so on).
Unfortunately for Ontarians, interest payments on debt will continue to eat up a growing portion of their 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 for health (1.8 per cent) and education (0.3 per cent).
Collectively, the story is equally sobering. Canadian governments spent a cumulative $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 available).
These substantial payments exist despite historically low interest rates. If 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.
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.
The report Cost of Government Debt in Canada is available at www.fraserinstitute.org.