Annual interest on Canada’s government debt translates into $7,000 for a family of four

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Appeared in the Financial Post, January 19, 2017

It’s easy to think that government debt doesn’t matter. A prime example is the surprising lack of widespread media coverage of the federal government’s recent long-term projections of its finances over the next 40 years. The analysis found that under existing policies and a set of assumptions, Ottawa can expect to run deficits every year from now until 2051, racking up at least $900 billion in new debt. If changes in government policies lead to higher spending, then the government would accumulate even more debt.

While there are many reasons to worry about these findings, we mustn’t overlook the tangible and immediate costs that government debt currently imposes on individual Canadians and their families. After all, they are significant.

For context, first consider the more than half-a-trillion dollars increase in government debt since 2007/08, when government debt in Canada started to climb. The federal government alone has added $211 billion in new debt. Throw in the $315 billion in new debt collectively added by the provinces and Canada’s federal-provincial debt now totals $1.4 trillion. Based on the latest budget plans of the federal and provincial governments, debt is set to soar even higher in the future.

But all of this government debt comes at an immediate cost in the form of interest payments. Governments must make interest payments on their debt similar to families who pay interest on credit card spending. Critically, interest payments on government debt are not discretionary. They must be paid. And they eat away at government revenues, leaving less money for other public priorities such as health care, education or even tax relief.

In 2016/17, interest payments on the federal debt will total $25 billion, which is more than what Ottawa plans to spend on transfers to Canadian families in the form of children benefits ($22 billion). It’s also equivalent to the federal government’s planned budgetary deficit ($25 billion). Put differently, in the absence of federal interest payments, Ottawa could wipe out its deficit this year, despite its marked increase in program spending.

But Canadians, of course, are not only responsible for servicing federal debt; they also have to service provincial and local government debt, too. When we add up all the interest payments of the various governments across the country (federal, provincial and local), the total in 2015/16 is $63 billion—approximately equal to the $64 billion Canada spent on public primary and secondary education in 2013/14, the latest year of available data.

Perhaps most telling of all, if we were to distribute the total annual cost of servicing Canada’s government debt equally, each Canadian’s share would be $1,752. That’s more than $7,000 for a family of four. Clearly, there’s a cost to government debt.

And these substantial interest payments exist despite historically low interest rates. If interest rates were to rise, the cost of government borrowing will go up as well, putting upward pressure on debt interest payments.

Interest payments are an important reason why Canadians should not be lulled into thinking that government debt does not matter. If governments continue to rack up debt, the cost of servicing the debt will also rise, other things equal. And that means fewer resources available for tax relief and the programs that matter to Canadians.

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