Canadians bear weight of growing government debt burden

As we enter budget season, it’s worth noting that government debt has been increasing in Canada for more than a decade and the current environment of rising interest rates will now make it more expensive to borrow money than in the recent past.

According to a recent study, federal and provincial government debt has nearly doubled (on an inflation-adjusted basis) from $1.1 trillion in 2007/08 to $2.1 trillion in 2022/23. Part of this increase is due to the large budget deficits governments ran during the pandemic. However, nearly 60 per cent of the run-up in debt occurred before COVID. In other words, this is not a new problem.

Debt accumulation is also not unique to just a few provinces. Every provincial government in Canada saw rising debt levels over the last decade-and-a-half and the federal government has followed suit.

But not all provinces are the same. Canadians face different government debt burdens depending on where they live. For instance, Newfoundlanders and Labradorians currently hold the highest combined (federal and provincial) government debt in Canada at $64,579 per person. Ontarians are not far behind ($59,773) while Albertans have the lowest combined government debt per person in Canada ($42,915).

The debt-to-GDP ratio (a measure that compares debt to the size of the overall economy) is another way to compare government debt between provinces. Notably, all four Atlantic provinces have combined debt-to-GDP ratios above 80 per cent in 2022/23. These numbers mean it would take at least four out of every five dollars in the respective provinces in one year to pay off their combined federal and provincial debt.

Nova Scotians have the highest combined federal and provincial debt burden in the country, equivalent to 93 per cent of their provincial economy.

Nationally, the combined federal-provincial net debt-to-GDP ratio in Canada will reach a projected 75 per cent this year, up from 66 per cent prior to the pandemic. And this growth will likely continue as Ottawa and some provincial governments plan to run budget deficits in the years ahead.

At the same time, provinces face challenges with health care and inflation. The suggested remedy by governments thus far has been to increase spending in the near-term, which will either increase budget deficits or reduce surpluses. But what are the consequences of more government debt?

Simply put, the burden of government debt falls on Canadian families today and on future generations. Like households, governments must pay interest on debt, which is ultimately paid by Canadians in the form of taxes. Due to higher debt and rising interest rates, the federal and provincial governments will collectively spend about $69 billion on annual debt interest payments this year, an increase of roughly $19 billion from two years ago.

Servicing debt leaves fewer resources for tax cuts or government programs such as health care and education. Debt interest payments create a wedge between the taxes we pay and the actual services we receive. And again, government debt not only burdens current taxpayers but future generations of Canadians who will finances the debt, potentially through higher taxes.

Growing government debt is not a new phenomenon in Canada. While COVID exacerbated the problem, debt was rising prior to the pandemic. This budget season, it’s up to both federal and provincial governments across the country to reverse this trend and return sustainability to finances over the long-term.