From the Fraser Institute

By Ben Eisen and Jake Fuss

As the federal deficit persists and government debt mounts, the burden of debt interest costs is growing for Canadian taxpayers.

The Trudeau government is on track for another large budget deficit forecasted at $40.0 billion, slightly larger than the $35.3 billion deficit last year. The government’s long-term forecast suggests deficits will continue throughout the projection period, which ends in 2028/29.

There’s nothing new about the federal books being splashed with red ink. The Trudeau government has run significant deficits every year of its tenure. What’s different this time, however, is that due to higher interest rates the cost of the government’s borrowing is much higher. As a result, debt costs are set to increase significantly in the years ahead, which will burden taxpayers today and in the future while also making it harder for future prime ministers and finance ministers to balance their books.

Let’s dig a bit deeper into the numbers. When the Trudeau government took power during fiscal year 2015/16, debt interest costs were $21.8 billion. In 2021/22, despite a long string of deficits and huge increase in debt, low interest rates during the period of intensive borrowing prevented a surge in debt interest costs, which stood at $24.5 billion.

But last fiscal year marked the start of a new chapter in Canada’s fiscal history as higher interest rates combined with significant debt accumulation caused debt interest costs to rise substantially, from $24.5 billion to $35.0 billion. Another similar increase is expected this year, with debt costs forecasted to rise to $46.5 billion—a 90 per cent increase in just two years with a further projected increase to $52.4 billion for next year.

This sudden increase in debt interest costs has important and immediate implications for federal finances. In 2021/22, 5.9 per cent of all federal revenue was spent on paying the interest on federal debt. By next year, according to Trudeau government forecasts, this will rise to 10.8 per cent.

Canadian history shows us how debt interest costs can quickly spiral out of control. During the debt crisis of the early 1990s, after many years of continuous deficits, debt interest costs were consuming one-third of every dollar Ottawa collected. Today’s debt interest costs are not as high as they were in the 1990s, but there’s no reason to wait until a crisis develops to take action.

The fact that debt interest is taking a bigger bite out of federal revenue should not just be a matter of academic concern for public finance economists. It affects all Canadian taxpayers. A larger share of the money collected from individuals and businesses being spent on debt leaves less for other priorities such as tax relief, which can help encourage economic growth, or core public services that Canadians value.

The Trudeau government has often spoken about the benefits of fiscal restraint but has thus far failed to exercise much of it. If the prime minister and his cabinet want to halt the growth in debt interest they must reverse the free spending that has characterized their time in government to slow the accumulation of debt.