Your share of Canadian government debt: more than $34,000

When Canada’s premiers met recently in Halifax, talks of a possible pipeline to move oil from Alberta to eastern Canada dominated national headlines. There was also mention of talks about trade, immigration, skills training, and infrastructure. One issue that didn’t receive nearly as much attention is the management of public finances and growing government debt.

The press release for the gathering at least paid lip service to the issue, noting that premiers agreed on the need for “a careful and responsible approach to the management of public finances by all governments.” If only the premiers walked the walk. Canadians need leadership to reduce government debt.

The state of public finances across the country underscores a worrying trend of growing government direct debt since 2007/08. Starting in 2008/09 the federal and most provincial governments began running a string of consecutive deficits. While a recession can lead to temporary deficits as revenues decline and some spending automatically increases, governments exacerbated the problem with large increases in “stimulus” spending.

Here we are three and a half years after the recession officially ended and governments are still running deficits and piling on more debt. This fiscal year (2012/13), the federal and nearly every provincial government expect to be in deficit; Saskatchewan is the only exception. Unfortunately, the trend may continue as some governments have plans to continue running deficits into the foreseeable future.

Partly as a result of ongoing deficits, the direct debt burden in Canada has grown considerably. Consider that the federal government’s net debt (gross debt minus financial assets) is expected to reach $676 billion this year, up more than $160 billion from the level in 2007/08. As a percentage of the economy (GDP), the federal debt burden will increase to 36 per cent from 34 per cent in 2007/08.

There’s been a similar trend at the provincial level. Collectively, provincial net debt has grown to $517 billion (28 per cent of GDP) from $321 billion (21 per cent of GDP) over the same period.

If the $1.2 trillion in combined federal and provincial government direct debt was equally distributed among all Canadians, each of us would be on the hook for $34,209.

But the burden of debt doesn’t end there. In addition to direct debt, Canadian governments have also committed themselves to providing programs that are not fully funded. That is, we’ve collectively promised to provide a host of programs which current tax rates leave unfunded. Two of the most significant and well known programs with unfunded liabilities are health care and Old Age Security (OAS).

According to our calculations, as of 2010/11 the unfunded liability of health care totalled approximately $538 billion, while that of OAS totalled $468 billion (this unpublished OAS estimate doesn’t account for changes to the age of eligibility starting in 2023). When summed up, the unfunded liabilities of these two programs alone equals more than $1 trillion or $29,475 per Canadian.

With large and growing liabilities, governments would be wise to take deliberate action to halt the growth in debt before the problem worsens. For starters, they should table more aggressive plans to balance their budgets instead of relying on the hope that revenues will grow robustly and eventually catch up to spending increases.

Robust revenue growth may not materialize in the current global economic environment which could bring slower than expected future economic growth. Lower than forecast commodity prices would especially hit provinces hard that depend on natural resource royalties.

On the spending side, our aging population means greater fiscal pressures are on the horizon. Spending demands on programs like health care and OAS will increase while the tax base of the working population shrinks disproportionately. Interest costs on debt may also turn out to be higher than expected, putting upward pressure on government spending.

Over the longer term, governments will have to make tough choices about reforming key programs such as health care and OAS. Increasing the age of eligibility to 67 from 65 for OAS is a good first step but too timid and narrow a reform that won’t be fully in force until 2029—18 years after the first baby boomers retire. Without more fundamental reform, young Canadians will have to dig much deeper into their pockets to pay their future tax bill.

The management of public finances may not have received due attention from the premiers in Halifax. But as our federal and provincial political leaders gear up for next year’s budget season, they would be wise to acknowledge the seriousness of growing government debt and put forth bold plans to balance their budgets. Kicking the debt down the road simply isn’t an option.