Montreal, October 31, 2016 – Whereas Ottawa is preparing to plunge even deeper into deficit than expected, it is a mistake to think that because of currently low interest rates, the government should borrow more. Those who make this argument forget that interest charges are not the only cost associated with a deficit, as shown in a Viewpoint published today by the MEI.
The federal deficit is rising, far beyond the $10 billion projected in the Liberal platform. The 2016-2017 budget fixed it at $29.4 billion, and it is expected that the November 1st budget update will raise it again substantially. The stated purpose is to stimulate the Canadian economy, whose prospects for growth are deteriorating.
“It is widely repeated that now is a good time to borrow since interest rates are very low. Some seem to forget that the cost of deficits is far greater than interest charges alone,” says Mathieu Bédard, Economist at the MEI and author of the publication.
The Viewpoint presents five alternative ways of thinking about the cost of deficits and infrastructure spending, namely: the risk of higher interest rates in the future, the cost of taxes needed to pay debt charges, the cost of infrastructure maintenance, the opportunity cost of government, and finally, the costs due to public sector pensions, which are rising.
“On this last point, it needs to be understood that currently low interest rates, by making pension performance objectives more difficult to attain, entail additional costs of $3 billion a year,” points out the author. “This erases a large part of the savings registered by the government thanks to lower public debt charges. In fact, the government finds itself already further in debt, before even borrowing an extra dime.”
The federal government must instead take action to regain control of public spending. Its current rate of indebtedness is already a concern, and represents a burden for the next generation.
“Increasing budget deficits to boost the economy, which certain economists and interest groups are urging the government to do, will only make matters worse. The best way to stimulate the economy is to remove obstacles for entrepreneurs and innovators by reducing taxes and the regulatory burden,” concludes Mathieu Bédard.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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