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Federal and Provincial Debt-Interest Costs for Canadians by Jake Fuss and Steve Lafleur

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Federal and Provincial Debt-Interest Costs for Canadians by Jake Fuss and Steve Lafleur FRASER RESEARCH BULLETIN February 2021 Federal and Provincial Debt-Interest Costs for Canadians by Jake Fuss and Steve Lafleur Summary In recent years, deficit spending and grow- 2020/21, which is roughly equivalent to what ing government debt have become a trend for the government expects to spend on Equaliza- many Canadian governments. Like households, tion ($20.6 billion) and collect in Employment governments are required to pay interest on Insurance Premiums ($21.5 billion). their debt. Ontarians are projected to spend $20.3 bil- In aggregate, the provinces and federal gov- lion on combined federal and provincial inter- ernment are expected to spend $49.6 billion on est costs in 2020/21, which is more than the interest payments in 2020/21. province will spend on infrastructure this year. Residents in Newfoundland & Labrador face Meanwhile, total expenditures on interest by far the highest combined federal-provincial costs for Albertans ($4.8 billion) is close to the interest payments per person ($2,604). Quebec, expected spending on advanced education in Canada’s second most populous province, is the the province. Combined federal-provincial in- next highest at $1,417 per person. terest costs for British Columbians ($5.5 billion) The federal government alone will spend are more than what the province expects to $20.2 billion on debt servicing charges in spend on its Medical Services Plan this year. fraserinstitute.org FRASER RESEARCH BULLETIN 1 Federal and Provincial Debt-Interest Costs Introduction Table 1: Federal and Provincial Interest For more than a decade, deficit spending and Costs, 2020-21 growing government debt have become a trend Interest costs Interest costs for many Canadian governments. Persistent (in millions as a percent deficits are now the norm for governments in of $) of revenue (%) Alberta and Ontario, while the federal govern- ment has increased spending and debt consid- BC 2,724 4.7 erably over the last decade. Indeed, combined AB 2,413 5.8 federal-provincial net debt is expected to reach SK 725 5.1 a record high $2.0 trillion in 2020/21 (Fuss and MB 959 5.5 Lafleur, 2021). It is expected that this trend will ON 12,456 8.2 continue for the foreseeable future, as govern- ments across the country deal with the fallout QC 7,573 6.4 from the COVID-19 pandemic. NB 655 6.4 NS 743 6.5 This accumulation of government debt has both PE 123 5.4 long-term and immediate costs. Like house- holds, governments are required to pay inter- NL 1,073 15.1 est on their debt. These interest payments con- FED 20,200 7.3 sume resources that would otherwise be used Total 49,643 7.0 for public priorities that would help families or improve Canada’s economic competitiveness. Note: Interest costs for 2020-21 are based on the latest As a result, less revenue may be available in the government projections available at the time of writing. future for tax relief or to support health care, Sources: Canada, Department of Finance (2020a); Alberta, education, and social services. Ministry of Finance (2020); British Columbia, Ministry of Finance (2020); Saskatchewan, Ministry of Finance (2020); This research bulletin examines the current Manitoba, Ministry of Finance (2020); Ontario, Ministry of level of government spending on interest pay- Finance (2020); Québec, Ministère des Finances (2020); ments in order to put these costs into perspec- Newfoundland & Labrador, Department of Finance (2020); tive for Canadians. In particular, it highlights New Brunswick, Department of Finance (2020); Nova Sco- the financial burden that interest costs place on tia, Department of Finance (2020); Prince Edward Island, families and shows the amount of revenue be- Department of Finance (2020); calculations by authors. ing spent to service the debt in comparison to other government budget items. displays the expected amount of interest that Current interest payments Canadian governments will pay in 2020/21. The The accumulation of government debt since table also shows those interest payments as a the 2008/09 recession has added to the billions percentage of total government revenues for the of dollars of interest costs Canadian govern- federal and provincial governments. This high- ments incur each year. Interest payments are lights the share of government resources direct- now a considerable budget expense for the fed- ed to interest costs and provides a sense of their eral and many provincial governments. Table 1 significance compared to other priorities. fraserinstitute.org FRASER RESEARCH BULLETIN 2 Federal and Provincial Debt-Interest Costs Table 2: Combined Federal and Provincial Interest Costs, 2020-21 Provincial interest Federal portion of Combined interest Combined interest costs ($ millions) interest costs ($ millions) costs ($ millions) costs per person BC 2,724 2,729 5,453 1,059 AB 2,413 2,346 4,759 1,076 SK 725 632 1,357 1,151 MB 959 736 1,695 1,229 ON 12,456 7,797 20,253 1,375 QC 7,573 4,579 12,152 1,417 NB 655 421 1,076 1,376 NS 743 523 1,266 1,293 PE 123 84 206 1,293 NL 1,073 287 1,360 2,604 Sources: Table 1; Statistics Canada (2020a); calculations by authors. Note: The combined federal and provincial interest cost is a total of provincial interest costs and the federal portion. The federal interest cost is allocated to each of the provinces based on a 5-year average (2016-2020) of their population as a share of Canada’s total population. Federal interest payments are expected to It is also important to mention that these in- reach $20.2 billion, or 7.3% of total federal rev- terest payments come at a time when govern- enues, in 2020/21. In other words, the federal ments are able to borrow at very low interest government is currently spending about 7 cents rates. Should interest rates rise in the future, of every dollar in revenue on interest payments. the cost of borrowing would increase over time.1 Under those circumstances, even more Among the provinces, current projections sug- resources would need to be directed towards gest Newfoundland & Labrador will dedicate interest payments for governments with high the largest percentage of its revenue to inter- debt levels, such as Ontario and Newfound- est payments at 15.1%. Ontario is expected to land & Labrador. Growing interest costs as a come in second by spending 8.2% of its provin- percentage of the economy could lead to a vi- cial revenues on interest payments—a $12.5 bil- cious cycle where more revenue is required lion expense. Every province (except for Brit- to finance government debt, leaving fewer re- ish Columbia) is projected to spend 5.0% or more of their revenues on interest payments in 1 This would be a gradual change which would oc- 2020/21. In aggregate, the provinces and feder- cur as debt is rolled over. If both interest rates and al government will spend $49.6 billion on inter- debt grow, then expenditures on interest payments est payments this year. will grow in government budgets as well. fraserinstitute.org FRASER RESEARCH BULLETIN 3 Federal and Provincial Debt-Interest Costs sources for the private sector.2 This could also Notably, however, interest payments incurred raise the spectre of tax increases to finance the by local governments are excluded from these increased debt burden, which could undermine numbers.4 Generally, local governments are un- investor confidence. able to accumulate much debt because prov- inces place regulations and restrictions on lo- Burden on Canadians cal government debt. However, local interest costs did account for roughly 5 percent of to- Federal and provincial interest payments are tal government interest expenses in Canada in ultimately paid by Canadians in the form of 2019/20 (the latest year of available data). Once taxes. Table 2 shows the combined federal and local interest costs are included, total interest provincial interest costs in total dollars and per payments in Canada increase by billions of dol- person for 2020/21 for each province. Federal lars more. interest payments were allocated to the prov- inces based on a 5-year average (2016-2020) of Interest costs in perspective their share of the total Canadian population.3 When interest costs rise, fewer resources re- Residents in Newfoundland & Labrador face by main for tax relief and important public pro- far the highest combined per-person federal- grams. To put this into perspective, interest provincial interest payments ($2,604). Quebec, costs will now be compared with other govern- Canada’s second most populous province, is the ment spending initiatives, sources of govern- next highest at $1,417 per person—representing ment revenue, and other budgetary items. In $12.2 billion in total annual interest payments. addition to exploring the federal government In contrast, British Columbians face the low- and the country as a whole, this section will est per-person interest costs in the country provide comparisons for the four most popu- ($1,059). These values make it clear that grow- lous provinces (Ontario, Quebec, Alberta, and ing government debt is now a substantial bur- British Columbia). den for Canadian taxpayers to bear. Federal interest costs For the federal government, interest expenses 2 Ontario and Newfoundland & Labrador are the are expected to equal $20.2 billion in 2020/21 provinces with the most debt as a share of their (Canada, Department of Finance, 2020a). To il- economy. In 2020-21 Ontario’s net debt amounts to lustrate the magnitude of this cost, figure 1 $398.0 billion (or 46.3 percent of GDP) and New- shows how this compares to other spending foundland & Labrador’s net debt is $16.4 billion (or items in the federal budget.
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