Interest payments on government debt in Canada consume a sizeable share of government revenue, leaving less money for public priorities such as schools, hospitals, highways and lower taxes, finds a new study released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.
The study, The Cost of Government Debt in Canada, spotlights the growth of government debt in Canada since the 2008/09 recession, and the cost of interest payments on government debt.
“Whether you’re talking about a household or a government, when you take on debt, you have to pay interest, which leaves less money in the budget for other priorities,” said Sean Speer, study co-author and associate director of the Fraser Institute’s Centre for Fiscal Studies.
Since fiscal year 2007/08, Canada’s combined federal and provincial debt has increased from $823 billion to more than $1.2 trillion in 2013/14 (or $34,905 for every Canadian man, woman and child). To service this debt, Canadian governments (federal, provincial and local) collectively spent $61.7 billion on interest payments in 2013/14, more than the $61 billion spent on primary and secondary education across the country in 2011/12 (the latest year of available data).
More specifically, in 2013/14 the federal government, which is $688 billion in debt, spent $29.3 billion on interest payments (or more than 11 cents of every dollar of revenue). Meanwhile, it collected $29.9 billion in GST from Canadian taxpayers.
In Ontario, the provincial government in 2013/14 spent $10.6 billion on interest payments, or 9.1 per cent of overall revenue, eclipsing the entire budget for the Ministry of Community and Social Services ($10.1 billion), and nearly topping the province’s total infrastructure spending ($10.8 billion).
“As Ontario struggles to rein in deficits and growing government debt, interest payments chew up big chunks of taxpayer money at the expense of priorities such as health care and education or potential tax cuts,” said Charles Lammam, study co-author and resident scholar in economic policy at the Fraser Institute.
In Quebec, the provincial government in 2013/14 also spent $10.6 billion on debt interest payments, far exceeding the amount ($7.8 billion) it received from Canadian taxpayers in equalization payments.
“Quebec and Ontario are deeper in debt than every other province. Yet instead of getting their fiscal houses in order, both governments continue to avoid the tough decisions needed to repair their public finances,” Speer said.
Finally, while debt levels are important, higher interest rates pose a real threat to indebted governments in Canada.
“Governments have been borrowing at historically low interest rates, so if interest rates rise, the cost of carrying debt will increase. Ontario and Quebec are especially vulnerable to interest rate hikes,” Lammam said.
“This year’s round of federal and provincial government budgets unfortunately did little to reverse the trend of growing debt in Canada. The longer the delay, the larger the repayment burden will be on the next generation of Canadian taxpayers,” Speer said.
The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute’s independence, it does not accept grants from governments or contracts for research. Visit fraserinstitute.org.
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