New federal government can't continue debt binge

Several policy issues including childcare and healthcare were at the forefront of discussions surrounding the federal election. However, little attention was provided to basic fiscal issues such as deficits and debt accumulation during the campaign and the newly elected Liberal minority government will need to prioritize solutions to these challenges sooner rather than later.

The Liberal minority government has committed to spend more money than it planned to before the election and it will finance these campaign initiatives almost exclusively through additional debt. Indeed, the new government plans to immediately add at least $13 billion in spending this year and increase the deficit to $156.9 billion. Their platform also includes plans to run an estimated $179.2 billion in cumulative deficits between 2022/23 and 2025/26.

Running deficits that are higher than these projections is also not out of the question as the Liberals must accommodate spending demands from other opposition parties like the NDP to pass budget bills. This is concerning for the health of federal finances since the Parliamentary Budget Officer estimated the federal government was already not on track to balance its budget until 2070 before any campaign commitments were made. Raising spending will only result in a further deterioration of finances in Ottawa and make it more difficult for subsequent governments to restore fiscal prudence.

There are obvious costs associated with running large and persistent deficits, while racking up significant government debt. For instance, Canadians of all ages will have to pay for our borrowing today through additional taxation in the future. In other words, today’s federal deficits can be thought of as tomorrow’s taxes.

A recent study estimated that Canadians aged 16 to 80 in 2025 will pay an average of roughly $10,500 per person in additional personal income taxes over their lifetimes due to the higher interest costs the federal government will incur from current and future borrowing. While all Canadians can expect to pay thousands of dollars in additional personal income taxes because of government interest expenses, the costs will not be evenly felt by all Canadians.

Specifically, younger Canadians will bear a much larger share of the additional tax burden compared to older generations. As a direct consequence of rising interest costs to service federal debt, estimates suggest Canadians aged 16 to 35 will pay an average of $19,880 per person in additional personal income taxes over their lifetimes. In contrast, individuals over the age of 65 will only pay $1,524 per person, which is less than one-tenth of the burden faced by younger Canadians. Put simply, the potential growth of federal debt and interest costs should be concerning for all Canadians, but especially young Canadians.

The expected increase in future taxes due to rising interest costs is also concerning for another reason. Taxes are already the single largest expense for Canadian families today. Indeed, families currently spend more of their income on taxes (36.4 per cent) than what they spend on food, clothing, and housing combined (35.4 Per cent). When families are faced with tax increases in the coming years and decades, the tax bill will consume even more of their income and leave less money available for other expenses.

It will be critical for the Liberal minority government to develop a credible plan to balance the budget and stop debt accumulation in a prudent manner following the conclusion of the COVID-19 pandemic. A failure to do so means that Canadians, particularly younger generations, will pay significantly more in taxes during their lifetimes as a consequence.