Government debt is eating up tax dollars that could pay for better services and a stronger economy

Too many Canadians are dangerously indifferent about government. They think that it is not relevant to their lives and feel that they could have no influence on it in any case. When Canadians do think about their government, most often it is to complain about the housing situation or the rising cost of living.

A big turnoff to many people is anything to do with government financing, especially budgets, debts and deficits. They are seen as too boring, too complicated and of little importance to one’s ordinary life. This is a big mistake. Government financing determines the taxes we pay and the public services we do or do not receive.

Government budgets, like those of businesses or households, estimate revenue (in this case, mainly taxes) and expenditures. In a good budget, the former should exceed the latter. As someone once wisely said, if your outgo exceeds your income, your upkeep will be your downfall.

Alas, at the federal and lower levels of government in Canada and in so many other countries, budgeted expenditure exceeds planned revenue. The difference is the deficit, and deficits turn into debt. When governments continually run deficits, as most have been doing, that debt grows. Canada’s government debt is currently estimated at 113.5 per cent of our total annual output, higher than in many other countries, though slightly lower than in the U.S., where debt is over 120 per cent of GDP.

To cover their deficits, governments must borrow money and pay interest on it. Lenders, mainly in the private sector, must be willing to buy this debt, usually in the form of government bonds. As debts grow, investors may become more concerned about the risks of lending to governments. They also have other investment opportunities, including in rapidly developing areas like artificial intelligence.

To attract these investors, governments may have to pay higher interest rates. Until recently, interest payments were not such a serious problem because rates were low, making borrowing cheap. Now interest rates are higher, and future borrowing costs remain uncertain given inflationary pressures, wars and the unsettled political situation in the world.

As old government bonds come due, governments often have to borrow again to repay them. If interest rates have risen, that new borrowing costs more.

In Canada right now, over eight per cent of government spending goes to cover interest costs on the debt. These charges are now over $90 billion. As governments continue borrowing, interest costs could consume an even larger share of public spending. Since more than one-third of the debt is held by Americans, a substantial portion of these payments also goes to the United States.

This is where government debt becomes a problem for every Canadian. Tax dollars spent on interest payments are not available to provide the services we want from our governments, like health care and pensions. They cannot be used to invest in the major projects and infrastructure that we need to improve our productivity and our standard of living. In fact, such projects are often financed with even more government debt, adding to future interest obligations.

Most Canadians would prefer to see an improvement in their standard of living through lower taxes or other means. Over the last decade, economic output per person in Canada has risen by only 4.2 per cent, or less than half a per cent per year. In some years, it has actually fallen. Over that same decade, per capita output in the U.S. rose by 16 per cent. With more tax dollars going toward interest payments, we have less money to invest in improving our economy.

What can we do about this dire situation? When one wants to get out of a hole, the first step is to stop digging. Before we can improve our present situation, we must stop making it worse with continuing deficits. We need to start running surpluses in order to be able to reduce the size of the debt. At the very least, we need balanced budgets so that the debt is not increasing.

There are only two basic ways to balance a budget: increase taxes or reduce government spending. Some combination of both can also be used. Canadians would not be happy about higher taxes, which would mean another attack on our already beleaguered disposable income and standard of living. Canada’s currently high level of taxation relative to other countries is already impeding investment and economic growth.

Cutting government spending is also difficult. It is said that when the fire department’s budget is reduced, the first thing that gets cut is the water. Nevertheless, serious determination and good management can lead to reduced government spending with minimal harm done.

There is no easy or fast solution to our current situation, but not biting the bullet or tackling it head-on right now will only lead to an even bigger problem in the future. The longer governments postpone difficult decisions, the more of Canadians’ tax dollars will go toward paying for yesterday’s spending rather than meeting tomorrow’s needs.

Dr. Roslyn Kunin is a respected Canadian economist known for her extensive work in economic forecasting, public policy, and labour market analysis. She has held various prominent roles, including serving as the regional director for the federal government’s Department of Employment and Immigration in British Columbia and Yukon and as an adjunct professor at the University of British Columbia. Dr. Kunin is also recognized for her contributions to economic development, particularly in Western Canada.