February 29, 2016

On January 5, 2016, the Fraser Institute released a report entitled The Cost of Government Debt in Canada.  One of the key things that stood out in their analysis was the fact that governments often pay out more in interest charges on their debt than they do on key social programs.

I think we all have heard a great deal of commentary on the alarming levels of personal debt in this country; mortgages, credit cards, etc.  But the debt issue goes far beyond our personal credit obligations.  According to the Fraser Institute study, combined federal and provincial debt in Canada will exceed $1.3 trillion in 2016.  Yes, the “T” word.  I have always thought there was a disconnect with the public in terms of how much these sums are.  It seems as if sometimes the numbers are just so large that they don’t have any resonance.  Even one of the report’s co-authors stated that the above number was “not a trivial amount.”  Not trivial?  I should hope not.

Looking at the near term, these “not trivial” interest payments suck up revenues that could be allocated to a myriad of social programs, health care, education, and so forth.  According to the report, at the present time local, provincial and federal governments combined pay over $60 billion per year just on debt service.  While many academics will argue that a certain level of national and regional debt can enhance economic growth, there is also a lot of research to suggest that there is a tipping point beyond which the debt level actually softens economic vitality.

So, in terms of levels and cost, that’s where we find ourselves right now.  What about the prospects for the future?  Pretty much across the board, government spending is increasing.  Ontario is probably the poster child for this, and will soon owe more than $300 billion.  Given the population of Ontario, that is a staggering per capita debt load.  The new federal government intends to spend billions more on infrastructure initiatives.

Following are some interesting facts presented in the report:

At the federal level, the government expects to spend almost $26 billion on debt service.  Just to put that number into some kind of context, last year about $24 billion was spent on national defence.

In Ontario, the debt service bill is about $11.3 billion a year.  The province’s total welfare system costs are just slightly less than that.

Quebec spends $10.3 billion a year on interest payments, but only $5.3 billion on post-secondary education.

British Columbia spends $2.5 billion a year on debt service, but only about $1.3 billion on childcare.

The list goes on.

The essence of the problem is that spending continues to grow, but revenues are flat to down.  What are the implications of this?

Until the economy becomes much more robust, tax revenues will not increase substantially.  The gap between revenues and expenses will continue to widen.  If one accepts the fact that tax revenues will not be increasing much in near term, what are the options for government?

The most sensible option in this scenario would of course be to reduce government spending.  I would be very surprised if that happens.  Another course of action would be to continue to issue debt to fund deficits, obviously adding fuel to the fire.  Another option, and we have seen this in Ontario and will be seeing it at the federal level, is to increase taxes.  The full burden of that has fallen on what various governments call “the wealthy.”  While the situation is far from hopeless at this point, governments need to make some tough and  intelligent choices, and they need to make them soon.
Howard Goodman
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.

This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation).  The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc.

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