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Fraser Institute

Federal government should have taken own advice about debt accumulation

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From the Fraser Institute

Authors: Grady Munro Jake Fuss

In 2024/25 the federal government now expects to pay $54.1 billion in debt interest, or $1,331 per Canadian, which is $2.0 billion more than it plans to spend on health care transfers to provinces.

In the foreword of the Trudeau government’s recent budget, Finance Minister Chrystia Freeland declared that, “it would be irresponsible and unfair to pass on more debt to the next generations.” Minister Freeland is absolutely right—if only she had listened to her own advice.

Fairness was the purported theme of this federal budget and nearly every new policy is presented as something that will help make life fairer for Canadians—especially younger generations. But the glaring contradiction is that partly due to all of the new spending on these policies, the Trudeau government is doing the very thing it admits is “unfair” and saddling future generations with hundreds of billions in added debt.

By 2027/28, the Trudeau government plans to add $395.6 billion to the total (gross) amount of debt held federally, which is $180.0 billion more than it planned to add just last spring. Overall, gross debt is projected to increase by nearly 20 per cent over the next four years. Adjusting for population growth and inflation during this period, by the end of 2027/28 every Canadian will be responsible for $2,301 more in gross federal debt than they are currently.

Much of this added debt stems from the introduction of new programs, which have caused federal program spending (total spending minus debt interest) over the next four years to be an expected $77.2 billion higher than was forecasted last spring. And though the Trudeau government will increase capital gains taxes to try and pay for this new spending, much of the new spending will still be financed through borrowing. Indeed, combined deficits from 2024/25 to 2027/28 are $44.7 billion higher than forecasted in last year’s budget, and there is no balanced budget in sight at all.

The problem with accumulating substantial amounts of debt, and why Minister Freeland is right when she asserts that it’s “irresponsible and unfair,” is that a growing government debt burden imposes costs on Canadians now and in the future.

One of the most important consequences of government debt are debt interest payments. These interest payments represent taxpayer dollars that don’t go towards any programs or services for Canadians, and have grown to impose a significant burden on federal finances. Specifically, in 2024/25 the federal government now expects to pay $54.1 billion in debt interest, or $1,331 per Canadian, which is $2.0 billion more than it plans to spend on health care transfers to provinces.

While debt interest costs represent a more immediate impact, debt accumulated today must also ultimately be paid for by future generations, again in the form of higher taxes. In fact, research suggests that this effect may be disproportionate, with one dollar borrowed today needing to be paid back by more than one dollar in future taxes.

One study estimates that Canadians aged 16 can expect to pay the equivalent of $29,663 over their lifetime in additional personal income taxes as a consequence of rising federal debt. Older age groups shoulder a much smaller burden in comparison. A 65-year-old can expect to pay $2,433 over their lifetime in additional personal income taxes due to rising federal debt.

The outsized burden of federal debt borne by younger generations of Canadians is hardly what any reasonable person would consider “fair.”

For all its talk about fairness and helping the next generation of Canadians, the Trudeau government’s incessant spending and substantial debt accumulation will simply result in young Canadians paying disproportionately higher taxes in the future. Does that seem fair to you?

Business

Ottawa’s avalanche of spending hasn’t helped First Nations

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From the Fraser Institute

By Tom Flanagan

When Justin Trudeau came to power in 2015, he memorably said that the welfare of Indigenous Canadians was his highest priority. He certainly has delivered on his promise, at least in terms of shovelling out money.

During his 10 years in office, budgeted Indigenous spending has approximately tripled, from about $11 billion to almost $33 billion. Prime Minister Trudeau’s instruction to the Department of Justice to negotiate rather than litigate class actions has resulted in paying tens of billions of dollars to Indigenous claimants over alleged wrongs in education and other social services. And his government has settled specific claims—alleged violations of treaty terms or of the Indian Act—at four times the previous rate, resulting in the award of at least an additional $10 billion to First Nations government.

But has this avalanche of money really helped First Nations people living on reserves, who are the poorest segment of Canadian society?

One indicator suggests the answer is yes. The gap between reserves and other communities—as measured by the Community Well-Being Index (CWB), a composite of income, employment, housing and education—fell from 19 to 16 points from 2016 to 2021. But closer analysis shows that the reduction in the gap, although real, cannot be due to the additional spending described above.

The gain in First Nations CWB is due mainly to an increase in the income component of the CWB. But almost all of the federal spending on First Nations, class-action settlements and specific claims do not provide taxable income to First Nations people. Rather, the increase in income documented by the CWB comes from the greatly increased payments legislated by the Liberals in the form of the Canada Child Benefit (CCB). First Nations people have a higher birth rate than other Canadians, so they have more children and receive more (on average) from the Canada Child Benefit. Also, they have lower income on average than other Canadians, so the value of the CCB is higher than comparable non-Indigenous families. The result? A gain in income relative to other Canadians, and thus a narrowing of the CWB gap between First Nations and other communities.

There’s an important lesson here. Tens of billions in additional budgetary spending and legal settlements did not move the needle. What did lead to a measurable improvement was legislation creating financial benefits for all eligible Canadian families with children regardless of race. Racially inspired policies are terrible for many reasons, especially because they rarely achieve their goals in practise. If we want to improve life for First Nations people, we should increase opportunities for Canadians of all racial backgrounds and not enact racially targeted policies.

Moreover, racial policies are also fraught with unintended consequences. In this case, the flood of federal money has made First Nations more dependent rather than less dependent on government. In fact, from 2018 to 2022, “Own Source Revenue” (business earnings plus property taxes and fees) among First Nations bands increased—but not as much as transfers from government. The result? Greater dependency on government transfers.

This finding is not just a statistical oddity. Previous research has shown that First Nations who are relatively less dependent on government transfers tend to achieve higher living standards (again, as measured by the CWB index). Thus, the increase in dependency presided over by the Trudeau government does not augur well for the future.

One qualification: this finding is not as robust as I would like because the number of band governments filing reports on their finances has drastically declined. Of 630 First Nation governments, only 260 filed audited statements for fiscal 2022. All First Nations are theoretically obliged by the First Nations Financial Transparency Act, 2013, to publish such statements, but the Trudeau government announced there would be no penalties for non-compliance, leading to a precipitous decline in reporting.

This is a shame, because First Nations, as they often insist, are governments, not private organizations. And like other governments, they should make their affairs visible to the public. Also, most of their income comes from Canadian taxpayers. Both band members and other Canadians have a right to know how much money they receive, how it’s being spent and whether it’s achieving its intended goals.

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Education

‘Grade inflation’ gives students false sense of their academic abilities

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From the Fraser Institute

By Michael Zwaagstra

The average entrance grade at the University of British Columbia is now 87 per cent, up from 70 per cent only 20 years ago. While this is partly because the supply of available university spots has not kept pace with growing demand, it’s also likely that some B.C. high schools are inflating their students’ grades.

Suppose you’re scheduled for major heart surgery. Shortly before your surgery begins, you check into your surgeon’s background and are pleased to discover your surgeon had a 100 per cent average throughout medical school. But then you learn that every student at the same medical school received 100 per cent in their courses, too. Now you probably don’t feel quite as confident in your surgeon.

This is the ugly reality of “grade inflation” where the achievements of everyone, including the most outstanding students, are thrown into question. Fortunately, grade inflation is (currently) rare in medical schools. But in high schools, it’s a growing problem.

In fact, grade inflation is so prevalent in Ontario high schools that the University of Waterloo’s undergraduate engineering program uses an adjustment factor when evaluating student applications—for example, Waterloo might consider a 95 per cent average from one school the equivalent of an 85 per cent average from another school.

Grade inflation is a problem in other provinces as well. The average entrance grade at the University of British Columbia is now 87 per cent, up from 70 per cent only 20 years ago. While this is partly because the supply of available university spots has not kept pace with growing demand, it’s also likely that some B.C. high schools are inflating their students’ grades.

Sadly, grade inflation is so rampant these days that some school administrators don’t even try to hide it. For example, earlier this year all students at St. Maximilian Kolbe Catholic High School in Aurora, Ontario, received perfect marks on their midterm exams in two biology courses and one business course—not because these students had mastered these subjects but because the York Catholic District School Board had been unable to find a permanent teacher at this school.

The fact that a school board would use grade inflation to compensate for inadequate instruction in high school tells us everything we need to know about the abysmal academic standards in many schools across Canada.

And make no mistake, student academic performance is declining. According to results from the Programme for International Assessment (PISA), math scores across Canada declined from 532 points in 2003 to 497 points in 2022 (PISA equates 20 points to one grade level). In other words, Canadian students are nearly two years behind on their math skills then they were 20 years ago. While their high school marks are going up, their actual performance is going down.

And that’s the rub—far from correcting a problem, grade inflation makes the problem much worse. Students with inflated grades get a false sense of their academic abilities—then experience a rude shock when they discover they aren’t prepared for post-secondary education. (According to research by economists Ross Finnie and Felice Martinello, students with the highest high school averages usually experience the largest drop in grades in university). Consequently, many end up dropping out.

Grade inflation even hurts students who go on to be academically successful because they suffer the indignity of having their legitimate achievements thrown into doubt by the inflated grades of other students. If we want marks to have meaning, we must end the practise of grade inflation. We do our students no favours when we give them marks they don’t really deserve.

Just as our confidence in a surgeon would go down if we found out that every student from the same medical school had a 100 per cent average, so we should also question the value of diplomas from high schools where grade inflation is rampant.

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