Liberal budget takes on a reckless amount of new debt

The last budget presented by the Liberal government of Justin Trudeau—its first in over two years—is another step toward irresponsible indebtedness that will burden an entire generation of Canadians, if not more. On top of the hundred billion dollars of new spending, the government seems to have no intention of ever returning to a balanced budget. No date has been proposed for getting back to budgetary balance, nor is there so much as the start of an action plan to do so.

In contrast, new projects and social programs are numerous. Under the pretext of a post-COVID-19 economic recovery plan, the government is spending freely and showering promises on a wide range of voters. Yet the economic recovery is already stronger than predicted, and many of these expenditures are not the kinds of one-time items we would expect to see in order to address a temporary crisis. Unfortunately, permanent solutions to transitory problems often end up doing more harm than good.

Canada is now caught up in a spiral, condemned to seeing its debt increase substantially in the coming years. Indeed, the interest that we need to pay on the debt each year is currently $22 billion a year, or 6% of the federal government’s total budget. Considering the dizzying spending increases announced, no less than 9% of the budget, or some $39 billion, will serve to finance our federal debt as of 2025-2026. In short, nearly one dollar out of every ten will go toward the debt. And that’s just to cover the interest, without paying back a single dime of capital.

What does this $22 billion represent? It’s a huge number that can admittedly be difficult to grasp. To put in into perspective, we can say that it’s 187 times what we spend on supporting our veterans. If we instead compare it to home care, mental health, and homelessness prevention combined, nearly seven times more resources are allocated to paying interest on our country’s debt. By spending so much money just in order to pay the interest on the federal credit card, it will become harder and harder to meet Canadians’ legitimate needs in the future.

Worse yet, the excessively low interest rates that currently prevail mean that the amount needed to service the debt may soon increase substantially. Indeed, it’s a safe bet that interest rates will start to climb back up over the coming months and years. There are already strong inflationary pressures being observed in the United States, and it would be very surprising if Canada were spared from similar pressures. It wouldn’t take a very large interest rate hike to have a substantial effect, maybe a devastating effect, on our public finances and thus on the government’s ability to carry out its essential functions.

It is possible for the federal government to escape the vicious cycle it has gotten itself into, but doing so will require discipline and some very clear targets. A plan to return to a balanced budget is absolutely essential, a concrete plan that includes careful control

of direct program spending and tax reform that fosters growth and job creation. Unfortunately, there is no indication in this latest budget that the red ink will stop flowing anytime soon.

Miguel Ouellette is Director of Operations and Economist at the MEI, Maria Lily Shaw is an Economist at the MEI. They are the authors of “Debt Service Charges: Not the Main Type of Service We Should Be Funding” and the views reflected in this op-ed are their own.

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