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How the Government's Interest Payments Are Costing You

08/22/2014 05:11 EDT | Updated 10/22/2014 05:59 EDT
Zeljko Bozic via Getty Images

Canadian headlines about government deficits and debt can be dizzying and hard for people to grasp. A few billion here and several billion there and the natural response is for one's eyes to glaze over in despair. But the increasing government debt has tangible and immediate consequences that affect Canadian families today and into the future.

After reducing debt from the mid-1990s to late-2000s, Canadian governments reversed course in 2008/09, partially because of large increases in deficit-financed spending as governments tried to stimulate the economy in the wake of the recent recession.

Although evidence-based research casts serious doubt on a government's ability to stimulate economies this way, we are five years past the recession and governments continue to spend more than the revenues they collect while digging deeper into debt.

Since 2007/08, combined federal and provincial government debt has grown over $400 billion (or nearly 50 per cent) from $823 billion to over $1.2 trillion. If it sounds like a lot, it's because it is. Federal-provincial debt now equals over 65 per cent of the Canadian economy and represents $34,905 for every man, woman, and child living in Canada -- and that doesn't include indirect government debt such as unfunded program liabilities like health care and public pensions.

With several governments planning ongoing deficits for the future, don't expect the growth in debt to halt anytime soon.

But there are consequences.

Governments must make interest payments on their debt similar to families who pay interest on borrowing for mortgages, vehicles, or credit card spending. For some Canadian governments, interest payments consume more than 11 per cent of their revenue; that's 11 cents of every tax dollar they collect simply to service past debt obligations.

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 revenue sources and spending programs.

In 2013/14, interest payments on the federal debt totalled $29.3 billion, which roughly equals the $29.9 billion collected in GST revenue and the $32.3 billion spent on Old Age Security benefits for Canadian seniors.

In the same year, the Ontario government spent $10.6 billion on interest payments - more than the entire $10.1 billion budget for the ministry of community and social services and close to the $10.8 billion the government spent on infrastructure (roads, hospitals, schools, etc.).

Collectively the story is equally sobering. Canadian governments (including local governments) cumulatively spent $61.7 billion on interest payments in 2013/14, outpacing all public spending on K-12 education ($61.0 billion as of 2011/12, the last year for which we have data) and the three major federal-to-provincial government transfer programs ($58.6 billion).

Interest payments clearly aren't trivial when compared to other major revenue and spending items. If governments dig deeper into debt, interest payments could grow and eat up more government resources, displacing spending on things that Canadians care about and adding to the burden of repayment on future generations.

Although debt levels are important, higher interest rates (or the costs of borrowing) pose a real threat to indebted governments. Governments have been borrowing at historically low interest; if rates rise, the cost of carrying debt will increase. Governments that maintain relatively high and growing debt levels, such as Ontario and Quebec, are especially vulnerable to interest rate hikes.

Bottom line: deficit spending and growing government debt is not without 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.

Some may try to justify deficits and debt in certain circumstances but they can't ignore the immediate and future consequences. Five years after the recession, now is a good time to reverse the trend and rein in government debt.

Fraser Institute economist Milagros Palacios also contributed to this column.