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Federal debt interest will consume nearly one quarter of income tax revenue in 2024

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From the Fraser Institute

By Grady Munro and Jake Fuss

The Trudeau government will table its next budget on April 16. In recent years, the government has overseen a substantial rise in the amount of interest it must pay to service federal debt, reversing a long-standing trend of interest costs declining relative to personal income tax revenues. By 2024/25, according to projections, nearly one in four dollars of personal income tax revenue will go towards debt interest.

Just like how individuals must pay interest when they take out a mortgage, the government must also pay interest when it borrows money. These interest payments represent taxpayer dollars that don’t go towards programs or services for Canadians.

When interest costs rise faster than the government’s ability to pay—i.e. the revenues it brings in—the government will face pressure to take on more debt to maintain funding for programs and services. And by taking on more debt, this places additional upward pressure on interest costs (all else equal) and the cycle repeats.

A useful way to track this is to measure debt interest costs as a share of federal personal income tax (PIT) revenues, which represent Ottawa’s single-most important revenue source. In 2024/25, they’re expected to comprise just under half (46.4 per cent) of total revenues and therefore provide a useful gauge of the government’s ability to pay interest on its debt. As such, the chart below includes projections for federal debt interest costs as a share of PIT revenues for the two decades from 2004/05 to 2024/25.

Chart

As we can see from the chart, for many years federal debt interest costs had been declining as a share of Personal Income Tax revenues. In 2004/05, 34.6 per cent of PIT revenues went towards servicing federal debt, but by 2015/16 that share had fallen to 15.1 per cent. In other words, during the Trudeau government’s first year in office, federal interest costs consumed less than one in six dollars of personal income tax revenue paid by Canadians. Interest costs as a share of PIT revenues continued to fall for the next several years, down to a low of 11.7 per cent in 2020/21. However, this marked the end of the decline, and the years since have seen rapid growth in debt interest costs that far exceeds growth in PIT revenues.

In the two years from 2020/21 to 2022/23, federal interest payments rose from 11.7 per cent of PIT revenues to 16.8 per cent. And by the end of the upcoming fiscal year in 2024/25, debt interest payments will reach a projected 23.4 per cent of PIT revenues. In four years, debt interest payments are expected to have gone from consuming about one in nine dollars of PIT revenue to nearly one in four dollars. Put differently, nearly one quarter of the money taxpayers send to Ottawa in the form of personal income taxes will not go towards any programs or services in 2024/25.

The causes of this sudden rise in interest costs as a share of PIT revenues are the combined effects of a substantial accumulation of debt under the Trudeau government, and a recent rise in interest rates. From 2015/16 to 2022/23, the Trudeau government added $820.7 billion in gross federal debt, and by 2024/25 total debt will reach a projected $2.1 trillion—roughly double the amount inherited by the current government. Meanwhile, from 2022 to 2023, the Bank of Canada increased its policy interest rate from a low of 0.25 per cent to the current rate of 5.00 per cent.

Simply put, federal debt interest costs have risen and are expected to eat up almost one quarter of federal PIT revenues by 2024/25. To help prevent taxpayers from devoting an even larger share of their tax dollars towards debt interest, the Trudeau government should cease its heavy reliance on borrowing in this year’s federal budget.

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armed forces

Top Brass Is On The Run Ahead Of Trump’s Return

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From the Daily Caller News Foundation

By Morgan Murphy

With less than a month to go before President-elect Donald Trump takes office, the top brass are already running for cover. This week the Army’s chief of staff, Gen. Randy George, pledged to cut approximately a dozen general officers from the U.S. Army.

It is a start.

But given the Army is authorized 219 general officers, cutting just 12 is using a scalpel when a machete is in order. At present, the ratio of officers to enlisted personnel stands at an all-time high. During World War II, we had one general for every 6,000 troops. Today, we have one for every 1,600.

Right now, the United States has 1.3 million active-duty service members according to the Defense Manpower Data Center. Of those, 885 are flag officers (fun fact: you get your own flag when you make general or admiral, hence the term “flag officer” and “flagship”). In the reserve world, the ratio is even worse. There are 925 general and flag officers and a total reserve force of just 760,499 personnel. That is a flag for every 674 enlisted troops.

The hallways at the Pentagon are filled with a constellation of stars and the legions of staffers who support them. I’ve worked in both the Office of the Secretary of Defense and the Joint Chiefs of Staff. Starting around 2011, the Joint Staff began to surge in scope and power. Though the chairman of the Joint Chiefs is not in the chain of command and simply serves as an advisor to the president, there are a staggering 4,409 people working for the Joint Staff, including 1,400 civilians with an average salary of $196,800 (yes, you read that correctly). The Joint Staff budget for 2025 is estimated by the Department of Defense’s comptroller to be $1.3 billion.

In contrast, the Secretary of Defense — the civilian in charge of running our nation’s military — has a staff of 2,646 civilians and uniformed personnel. The disparity between the two staffs threatens the longstanding American principle of civilian control of the military.

Just look at what happens when civilians in the White House or the Senate dare question the ranks of America’s general class. “Politicizing the military!” critics cry, as if the Commander-in-Chief has no right to question the judgement of generals who botched the withdrawal from Afghanistan, bought into the woke ideology of diversity, equity and inclusion (DEI) or oversaw over-budget and behind-schedule weapons systems. Introducing accountability to the general class is not politicizing our nation’s military — it is called leadership.

What most Americans don’t understand is that our top brass is already very political. On any given day in our nation’s Capitol, a casual visitor is likely to run into multiple generals and admirals visiting our elected representatives and their staff. Ostensibly, these “briefs” are about various strategic threats and weapons systems — but everyone on the Hill knows our military leaders are also jockeying for their next assignment or promotion. It’s classic politics

The country witnessed this firsthand with now-retired Gen. Mark Milley. Most Americans were put off by what they saw. Milley brazenly played the Washington spin game, bragging in a Senate Armed Services hearing that he had interviewed with Bob Woodward and a host of other Washington, D.C. reporters.

Woodward later admitted in an interview with CNN that he was flabbergasted by Milley, recalling the chairman hadn’t just said “[Trump] is a problem or we can’t trust him,” but took it to the point of saying, “he is a danger to the country. He is the most dangerous person I know.” Woodward said that Milley’s attitude felt like an assignment editor ordering him, “Do something about this.”

Think on that a moment — an active-duty four star general spoke on the record, disparaging the Commander-in-Chief. Not only did it show rank insubordination and a breach of Uniform Code of Military Justice Article 88, but Milley’s actions represented a grave threat against the Constitution and civilian oversight of the military.

How will it play out now that Trump has returned? Old political hands know that what goes around comes around. Milley’s ham-handed political meddling may very well pave the way for a massive reorganization of flag officers similar to Gen. George C. Marshall’s “plucking board” of 1940. Marshall forced 500 colonels into retirement saying, “You give a good leader very little and he will succeed; you give mediocrity a great deal and they will fail.”

Marshall’s efforts to reorient the War Department to a meritocracy proved prescient when the United States entered World War II less than two years later.

Perhaps it’s time for another plucking board to remind the military brass that it is their civilian bosses who sit at the top of the U.S. chain of command.

Morgan Murphy is military thought leader, former press secretary to the Secretary of Defense and national security advisor in the U.S. Senate.

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Business

For the record—former finance minister did not keep Canada’s ‘fiscal powder dry’

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From the Fraser Institute

By Ben Eisen

In case you haven’t heard, Chrystia Freeland resigned from cabinet on Monday. Reportedly, the straw that broke the camel’s back was Prime Minister Trudeau’s plan to send all Canadians earning up to $150,000 a onetime $250 tax “rebate.” In her resignation letter, Freeland seemingly took aim at this ill-advised waste of money by noting “costly political gimmicks.” She could not have been more right, as my colleagues and I have written herehere and elsewhere.

Indeed, Freeland was right to excoriate the government for a onetime rebate cheque that would do nothing to help Canada’s long-term economic growth prospects, but her reasoning was curious given her record in office. She wrote that such gimmicks were unwise because Canada must keep its “fiscal powder dry” given the possibility of trade disputes with the United States.

Again, to a large extent Freeland’s logic is sound. Emergencies come up from time to time, and governments should be particularly frugal with public dollars during non-emergency periods so money is available when hard times come.

For example, the federal government’s generally restrained approach to spending during the 1990s and 2000s was an important reason Canada went into the pandemic with its books in better shape than most other countries. This is an example of how keeping “fiscal powder dry” can help a government be ready when emergencies strike.

However, much of the sentiment in Freeland’s resignation letter does not match her record as finance minister.

Of course, during the pandemic and its immediate aftermath, it’s understandable that the federal government ran large deficits. However, several years have now past and the Trudeau government has run large continuous deficits. This year, the government forecasts a $48.3 billion deficit, which is larger than the $40 billion target the government had previously set.

A finance minister committed to keeping Canada’s fiscal powder dry would have pushed for balanced budgets so Ottawa could start shrinking the massive debt burden accumulated during COVID. Instead, deficits persisted and debt has continued to climb. As a result, federal debt may spike beyond levels reached during the pandemic if another emergency strikes.

Minister Freeland’s reported decision to oppose the planned $250 onetime tax rebates is commendable. But we should be cautious not to rewrite history. Despite Freeland’s stated desire to keep Canada’s “fiscal powder dry,” this was not the story of her tenure as finance minister. Instead, the story is one of continuous deficits and growing debt, which have hurt Canada’s capacity to withstand the next fiscal emergency whenever it does arrive.

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