Cost of federal government debt rising for Canadians

From the Fraser Institute

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.

Authors:

Ben Eisen

Senior Fellow, Fraser Institute

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Related Topics:#BenEisen #DebtInterestCosts #FederalBudgetDeficit #FederalGovernmentDebt #FraserInstitute #JakeFuss

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Alberta’s fiscal update projects budget surplus, but fiscal fortunes could quickly turn

Published on November 21, 2024

Todayville

From the Fraser Institute

By Tegan Hill

According to the recent mid-year update tabled Thursday, the Smith government projects a $4.6 billion surplus in 2024/25, up from the $2.9 billion surplus projected just a few months ago. Despite the good news, Premier Smith must reduce spending to avoid budget deficits.

The fiscal update projects resource revenue of $20.3 billion in 2024/25. Today’s relatively high—but very volatile—resource revenue (including oil and gas royalties) is helping finance today’s spending and maintain a balanced budget. But it will not last forever.

For perspective, in just the last decade the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and as high as $25.2 billion (2022/23).

And while the resource revenue rollercoaster is currently in Alberta’s favor, Finance Minister Nate Horner acknowledges that “risks are on the rise” as oil prices have dropped considerably and forecasters are projecting downward pressure on prices—all of which impacts resource revenue.

In fact, the government’s own estimates show a $1 change in oil prices results in an estimated $630 million revenue swing. So while the Smith government plans to maintain a surplus in 2024/25, a small change in oil prices could quickly plunge Alberta back into deficit. Premier Smith has warned that her government may fall into a budget deficit this fiscal year.

This should come as no surprise. Alberta’s been on the resource revenue rollercoaster for decades. Successive governments have increased spending during the good times of high resource revenue, but failed to rein in spending when resource revenues fell.

Previous research has shown that, in Alberta, a $1 increase in resource revenue is associated with an estimated 56-cent increase in program spending the following fiscal year (on a per-person, inflation-adjusted basis). However, a decline in resource revenue is not similarly associated with a reduction in program spending. This pattern has led to historically high levels of government spending—and budget deficits—even in more recent years.

Consider this: If this fiscal year the Smith government received an average level of resource revenue (based on levels over the last 10 years), it would receive approximately $13,000 per Albertan. Yet the government plans to spend nearly $15,000 per Albertan this fiscal year (after adjusting for inflation). That’s a huge gap of roughly $2,000—and it means the government is continuing to take big risks with the provincial budget.

Of course, if the government falls back into deficit there are implications for everyday Albertans.

When the government runs a deficit, it accumulates debt, which Albertans must pay to service. In 2024/25, the government’s debt interest payments will cost each Albertan nearly $650. That’s largely because, despite running surpluses over the last few years, Albertans are still paying for debt accumulated during the most recent string of deficits from 2008/09 to 2020/21 (excluding 2014/15), which only ended when the government enjoyed an unexpected windfall in resource revenue in 2021/22.

According to Thursday’s mid-year fiscal update, Alberta’s finances continue to be at risk. To avoid deficits, the Smith government should meaningfully reduce spending so that it’s aligned with more reliable, stable levels of revenue.

Author:

Tegan Hill

Alberta

Alberta fiscal update: second quarter is outstanding, challenges ahead

Published on November 21, 2024

Government of Alberta

Alberta maintains a balanced budget while ensuring pressures from population growth are being addressed.

Alberta faces rising risks, including ongoing resource volatility, geopolitical instability and rising pressures at home. With more than 450,000 people moving to Alberta in the last three years, the province has allocated hundreds of millions of dollars to address these pressures and ensure Albertans continue to be supported. Alberta’s government is determined to make every dollar go further with targeted and responsible spending on the priorities of Albertans.

The province is forecasting a $4.6 billion surplus at the end of 2024-25, up from the $2.9 billion first quarter forecast and $355 million from budget, due mainly to higher revenue from personal income taxes and non-renewable resources.

Given the current significant uncertainty in global geopolitics and energy markets, Alberta’s government must continue to make prudent choices to meet its responsibilities, including ongoing bargaining for thousands of public sector workers, fast-tracking school construction, cutting personal income taxes and ensuring Alberta’s surging population has access to high-quality health care, education and other public services.

“These are challenging times, but I believe Alberta is up to the challenge. By being intentional with every dollar, we can boost our prosperity and quality of life now and in the future.”

Nate Horner, President of Treasury Board and Minister of Finance

Midway through 2024-25, the province has stepped up to boost support to Albertans this fiscal year through key investments, including:

$716 million to Health for physician compensation incentives and to help Alberta Health Services provide services to a growing and aging population.
$125 million to address enrollment growth pressures in Alberta schools.
$847 million for disaster and emergency assistance, including:
- $647 million to fight the Jasper wildfires
- $163 million for the Wildfire Disaster Recovery Program
- $5 million to support the municipality of Jasper (half to help with tourism recovery)
- $12 million to match donations to the Canadian Red Cross
- $20 million for emergency evacuation payments to evacuees in communities impacted by wildfires
$240 million more for Seniors, Community and Social Services to support social support programs.

Looking forward, the province has adjusted its forecast for the price of oil to US$74 per barrel of West Texas Intermediate. It expects to earn more for its crude oil, with a narrowing of the light-heavy differential around US$14 per barrel, higher demand for heavier crude grades and a growing export capacity through the Trans Mountain pipeline. Despite these changes, Alberta still risks running a deficit in the coming fiscal year should oil prices continue to drop below $70 per barrel.

After a 4.4 per cent surge in the 2024 census year, Alberta’s population growth is expected to slow to 2.5 per cent in 2025, lower than the first quarter forecast of 3.2 per cent growth because of reduced immigration and non-permanent residents targets by the federal government.

Revenue

Revenue for 2024-25 is forecast at $77.9 billion, an increase of $4.4 billion from Budget 2024, including:

$16.6 billion forecast from personal income taxes, up from $15.6 billion at budget.
$20.3 billion forecast from non-renewable resource revenue, up from $17.3 billion at budget.

Expense

Expense for 2024-25 is forecast at $73.3 billion, an increase of $143 million from Budget 2024.

Surplus cash

After calculations and adjustments, $2.9 billion in surplus cash is forecast.

$1.4 billion or half will pay debt coming due.
The other half, or $1.4 billion, will be put into the Alberta Fund, which can be spent on further debt repayment, deposited into the Alberta Heritage Savings Trust Fund and/or spent on one-time initiatives.

Contingency

Of the $2 billion contingency included in Budget 2024, a preliminary allocation of $1.7 billion is forecast.

Alberta Heritage Savings Trust Fund

The Alberta Heritage Savings Trust Fund grew in the second quarter to a market value of $24.3 billion as of Sept. 30, 2024, up from $23.4 billion at the end of the first quarter.

The fund earned a 3.7 per cent return from July to September with a net investment income of $616 million, up from the 2.1 per cent return during the first quarter.

Debt

Taxpayer-supported debt is forecast at $84 billion as of March 31, 2025, $3.8 billion less than estimated in the budget because the higher surplus has lowered borrowing requirements.