Deficits for 50 years—a plan fraught with risks and consequences

The latest federal budget showed that government finances are in poor shape and Ottawa expects to run deficits for the foreseeable future. But a recent Parliamentary Budget Officer (PBO) report concludes the fiscal situation may be much worse than originally thought.

Despite already amassing a significant amount of debt in the past 18 months or so, the federal government plans to accumulate hundreds of billions more in additional debt in coming years. The most recent budget indicated deficits until at least 2025/26 with no target date for a return to budget balance.

In total, Ottawa expects debt—that is, total liabilities minus total assets—will rise from $721.4 billion in 2019/20 to $1.4 trillion by 2025/26, an increase of 95.6 per cent in just six years. Over this same period, the federal debt-to-GDP ratio is expected to increase from 31.2 per cent to 49.2 per cent.

But where are federal finances headed beyond fiscal year 2025/26, the last year of projections included in the most recent federal budget?

Federal debt is expected to continue climbing as Ottawa fully implements new permanent spending programs including national childcare, national pharmacare and expanded employment insurance.

According to the PBO, the federal government will run deficits until 2070 without any additional recessions or changes in policy. This is concerning because failing to balance the budget for another five decades is fraught with risks and will impose substantial costs on Canadians.

Political rhetoric often frames Canada’s debt accumulation as prudent because interest rates are at historically low levels. However, interest rates are unlikely to stay this low, meaning there’s a real risk of higher rates in the future.

If interest rates rise, the federal government will pay larger interest payments to service its growing debt. The experience of the 1990s offers a sobering example of what can happen when interest rates rise, as federal interest payments consumed more than one in every three dollars of revenue at their peak. As more and more resources go towards debt-interest (instead of programs, services or tax relief), the gap between what we pay in taxes and what we receive in services widens.

Growing interest payments can also lead to larger and more persistent deficits and more debt accumulation, which makes it harder for the country to dig out of its fiscal predicament. Simply put, rising interest rates pose a significant risk to the state of federal finances.
 
Another consideration is that growing government debt imposes real costs on Canadian families. Today’s deficits are tomorrow’s taxes. In other words, debt accumulation today will burden younger Canadians responsible for paying higher taxes in the future to deal with the persistent deficits and rising interest payments to service the debt.

Failing to balance the budget until 2070 should concern all Canadians because of the risks and consequences associated with such a decision. Kicking the can down the road for several decades means young Canadian families will be left footing the bill.