Canadians pay the price for mounting government debt

It’s budget season in Canada, with the provinces and the federal government preparing their budgets for fiscal year 2021-22. Government debt, at both the federal and provincial level, has increased markedly over the last decade. A recent Fraser Institute study calculated that federal and provincial government debt (financial assets minus liabilities) is expected to surpass $2.0 trillion by the end of March. And yet, there’s been little conversation about the immediate and long-term consequences for Canadians.

But make no mistake, the burden of government debt falls on Canadian families today and on future generations. Like households, governments must pay interest on their debt, which is ultimately paid by Canadians in the form of taxes. Servicing the debt diverts resources away from services such as health care and education. In other words, interest payments create a wedge between the taxes we pay and the actual services we receive.

This year, Canadians in every province will pay more than $500 per person on provincial government debt interest costs alone. The debt burden varies widely across the country as some provinces are more indebted than others and interest rates may differ.

Ontario, for example, will spend nearly an estimated $13 billion on government debt interest costs in 2020/21—more than what the province expects to spend on post-secondary education. Provincial debt interest costs will equal about $845 per Ontarian.

The Newfoundland and Labrador spends almost $1.1 billion on annual government debt interest costs, which is roughly equivalent to the total amount it collects in HST revenue. Provincial debt interest costs equal $2,055 per person, the highest number of any province.

Obviously, Canadians also pay interest on federal debt. Ottawa will spend a projected $20.2 billion on federal debt interest costs this year—about the same amount it spends on Canada’s equalization program.

In aggregate, the provinces and the federal government will spend a projected $49.6 billion on combined debt interest payments this year. On a per-person basis, Newfoundlanders and Labradorians pay the highest combined (federal and provincial) government debt interest costs in Canada ($2,604) followed by Quebecers ($1,417). British Columbians pay the lowest ($1,059).

So clearly, government debt—spurred by persistent budget deficits and debt accumulation—comes at a cost. Of course, it’s sometimes necessary to accumulate debt to mitigate the impact of unique situations such as COVID-19. However, the extent of debt accumulation in 2020/21, and the substantial increase in government debt prior to the pandemic, are the primary sources of concern.

Finally, there’s a potential risk for federal and provincial debt interest costs to grow if interest rates, which are currently at historic lows, rise and/or governments continue to accumulate debt at a rapid pace.

This budget season and beyond, Canadians should understand that government debt comes with both immediate and future consequences. In every province, Canadians pay at least $1,000 per person on combined federal and provincial government debt interest costs this year. The debt burden will likely continue growing for the foreseeable future, with Canadians and their families paying the price.