#Monthly Lesson

#Monthly Lesson: Finances at a national level (Part2)

Continued from #Monthly Lesson: Finances at a national level (Part1)


Mid-1990s to the late 2000s: Reduced Govt Debt
2007-08: Combined federal and provincial government debt = $834 billion
2008-09: Govt turned to deficit-financed spending in hopes of stimulating the economy after the recent recession.
2015 – Govts continued to spend more than the revenue they collect while digging deeper into debt.
Combined federal and provincial government debt = $1.3 trillion
($450 billion Increase since 2007/2008)
2016 – Fed govt and 8 of 10 provinces are projecting operating deficits.
Federal-provincial debt = 65% of the Canadian economy (Approx)
= $35,827 for every man, woman and child living in Canada

All Canadian governments cumulatively spent $60.8 billion on interest payments in 2014-15, more than spending on pension benefits through the Canada and Quebec pension plans ($50.9 billion) and close to all spending on K-12 public education ($62.2 billion as of 2012-13, the latest year of available data).

Major Concern to increasing debt: The interest payments on the debt leave fewer resources available for important priorities such as tax relief and spending on health care, education social services and other public programs.

Why? Governments need to make interest payments on their debt, similar to families who pay interest on borrowing for mortgages, vehicles or credit card spending. Importantly, these substantial interest payments exist despite historically low interest rates. If interest rates rise, the cost of government borrowing will go up as well.

Federal, Ontario and Quebec governments now spend between $0.09 and $0.10 of every revenue dollar they collect to service debt. Governments that carry large debt burdens (such as Ontario and Quebec) are particularly vulnerable to interest-rate hikes.

Implication: Rising government debt can result in more resources going to interest payments and not to public priorities that benefit Canadian families or improve the country’s economic competitiveness.

Comparing Canada’s two largest governments’ interest payments to key spending initiatives

1) Federal government‘s expected total interest payments = $25.9 billion
Vs. Department of National Defence entire budget = $23.9 billion or
2016 Employment Insurance benefits = $19.3 billion

2) Ontario government‘s expected interest payments = $11.3 billion
Vs. Ministry of Community and Social Services’ entire budget = $11.1 billion
Infrastructure (roads, hospitals, schools, etc.) Spending = $11.9 billion

3) Ontario government’s debt interest payments annual growth: 6.7% (Avg) over the next three years – much faster than spending growth rates for health (1.8%) and education (0.3%).

So far pieces of the “national borrowing” puzzle have been highlighted. As the knowledge is power, it’s up to you what you’d like to do with it. Maybe you’d ask yourself  “Is it ok? Is it ok to leave the way things are? Or are there better ways to make better use of the tax money? Do I care? Should I care?”

Maybe you care. Maybe you don’t. But now you know at least. The knowledge is power and that power is in you. What you want to do about it is your choice.

The original post was published in Business in Vancouver (BIV) by three Fraser Institute analysts; Charles Lammam, Ben Eisen and Milagros Palacios. Click here for the original post.


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