Even With Low Interest Rates, Federal Deficits Are A Concern
With the federal government acknowledging in its fall update this week that it has no timetable for balancing the budget, it bears repeating that contrary to popular belief, low interest rates do not justify deeper deficits. This is because interest charges are not the only cost associated with a deficit.
The federal deficit is rising, far beyond the $10 billion projected in the Liberal's election platform. The stated purpose of running $130 billion of deficits over five years is to stimulate the Canadian economy, whose prospects for growth are deteriorating.
Yet despite currently low interest rates, there are other considerations that must be kept in mind when thinking about the cost of deficits and infrastructure spending. For one thing, there is no guarantee that interest rates will stay at this extremely low level for very long. A sudden hike could raise public debt charges, which apply not only to the amount of the deficit, but to the substantial portion of the public debt that must be refinanced (this year, a total of $278 billion will be borrowed).
There is also the cost of taxes needed to pay debt charges, which this year amount to $25.7 billion, or 8.7 per cent of the federal government's budget. There is the cost of infrastructure maintenance, which represent a significant proportion of overall costs over the life cycle of an infrastructure project — up to 80 per cent for some projects. There is the opportunity cost of government spending, since the resources redirected toward government projects are unavailable for private investments.
And there is the matter of the costs due to public sector pensions, which are rising. Our currently low interest rates, by making pension performance objectives more difficult to attain, entail additional costs of $3 billion a year. 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.
Instead of persisting in its plan to run up large deficits year after year with no end in sight, the federal government should instead take action to regain control of public spending. The cumulative federal debt is already worrisome, and represents a heavy burden for the next generation.
As for boosting the economy, increasing budget deficits as 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 reduce taxes and the regulatory burden, thereby removing obstacles for entrepreneurs, who are among the main engines of economic growth.
Jasmin Guénette is Vice President of the Montreal Economic Institute. The views reflected in this op-ed are his own.
Read more articles on the theme of "Taxation."