Liberal budget overtaken by interest obligation

 

Liberal budget overtaken by interest obligation

The sad case of Canada’s finances continues.  The Trudeau Liberals need to borrow $8.9 billion more than already budgeted by March 31, with the biggest need of $3.2 billion extra over previous estimates, to pay rising interest on the federal debt.

The government had previously denied parliamentarians these numbers, but they now show in Treasury Board President Anita Anand's Supplementary Estimates.  Apart from the finance charges — the single largest item — the extra money goes to indigenous health care and some military expenses.

But the extra spending will push the government’s overall spending for the 2023/24 fiscal year to $496.6 billion, an increase of $13.5 billion, and almost 3% over the previous fiscal year.  The new spending requests, known formally as the Supplementary Estimates, 2023-2024 were tabled on February 15 in the House of Commons.

It is more than just numbers though, bad as they are.  It represents the Liberals' irresponsible beliefs and philosophy about Canada.  Canada’s economic plight is reviewed in a report by Jake Fuss and Grady Munro of the Fraser Institute.

They show how budget deficits and increasing debt have become serious fiscal challenges facing the federal and provincial governments.  Since 2007/08, combined federal and provincial net debt (inflation-adjusted) has nearly doubled from $1.18 trillion to a projected $2.18 trillion in 2023/24.

Between 2019/20 (the last year before COVID) and 2023/24, the combined federal-provincial debt-to-GDP ratio is expected to grow from 65.7% to 76.2%.  Moreover, the federal and provincial governments are on track to have collectively accumulated $425.8 billion (inflation-adjusted) in total net debt between 2019/20 and 2023/24, an increase of 24.3%.  The federal net debt-to-GDP ratio has grown from 32.7% to 46.5%.

Interest payments are a consequence of debt accumulation.  Governments must make interest payments on their debt similar to households that must pay interest on borrowing related to mortgages, vehicles or credit card spending.  Revenues directed towards interest payments mean that in the future there will be less money available for tax cuts or government programs such as health care, education and social services.  Economists call it “crowding out”.

Growing government debt is therefore a big problem.  Studies have found that there is a negative relationship between government debt and economic growth.  Government debt has a significant effect on private investment. Long-term interest rates rise in response when government debt expands, which increases the cost of borrowing in the private sector.

Higher borrowing costs reduce the incentive for private capital investment such as the housing sector.  Declining investment levels pose a challenge to Canada’s ability to enhance productivity.  It reduces future economic performance.  Growing debt causes governments to raise taxes to pay debt or borrow more (Supplementary Estimates) to meet their interest payments, which in turn impedes economic growth.

Interest payments (debt servicing costs) are a consequence of repeated annual deficit budgets.  Like households, governments are required to pay interest on their borrowed money.  Revenue directed towards interest payments leaves less money available for government programs such as health care, education, social services or tax relief.  It is known as “crowding out”.

The debt burden for families made by governments across Canada has been growing substantially for more than a decade.  Sadly, spending and debt accumulation have become the norm for the federal and many provincial governments.

Rising government debt has severe consequences for Canadians, as more and more resources are directed toward interest payments and away from programs that help families or improve Canada’s economic competitiveness.  Since we are now past the COVID-19 pandemic, the federal and provincial governments should have plans to meaningfully address the problem of government debt in Canada.

Since the Trudeau administration came to power in November 2015, they have never balanced a budget. Given the recent Supplementary Estimates, it is clear they never will.  There is no adult to be found anywhere in the Prime Minister's Office.