From the Fraser Institute

By Tegan Hill and Jake Fuss

This fiscal year (2024/25), the federal government and eight out of 10 provinces project a budget deficit, meaning they’re spending more than collecting in revenues. Unfortunately, this trend isn’t new. Many Canadian governments—including the federal government—have routinely ran deficits over the last decade.

But why should Canadians care? If you listen to some politicians (and even some economists), they say deficits—and the debt they produce—are no big deal. But in reality, the consequences of government debt are real and land squarely on everyday Canadians.

Budget deficits, which occur when the government spends more than it collects in revenue over the fiscal year, fuel debt accumulation. For example, since 2015, the federal government’s large and persistent deficits have more than doubled total federal debt, which will reach a projected $2.2 trillion this fiscal year. That has real world consequences. Here are a few of them:

Diverted Program Spending: Just as Canadians must pay interest on their own mortgages or car loans, taxpayers must pay interest on government debt. Each dollar spent paying interest is a dollar diverted from public programs such as health care and education, or potential tax relief. This fiscal year, federal debt interest costs will reach $53.7 billion or $1,301 per Canadian. And that number doesn’t include provincial government debt interest, which varies by province. In Ontario, for example, debt interest costs are projected to be $12.7 billion or $789 per Ontarian.

Higher Taxes in the Future: When governments run deficits, they’re borrowing to pay for today’s spending. But eventually someone (i.e. future generations of Canadians) must pay for this borrowing in the form of higher taxes. For example, if you’re a 16-year-old Canadian in 2025, you’ll pay an estimated $29,663 over your lifetime in additional personal income taxes (that you would otherwise not pay) due to Canada’s ballooning federal debt. By comparison, a 65-year-old will pay an estimated $2,433. Younger Canadians clearly bear a disproportionately large share of the government debt being accumulated currently.

Risks of rising interest rates: When governments run deficits, they increase demand for borrowing. In other words, governments compete with individuals, families and businesses for the savings available for borrowing. In response, interest rates rise, and subsequently, so does the cost of servicing government debt. Of course, the private sector also must pay these higher interest rates, which can reduce the level of private investment in the economy. In other words, private investment that would have occurred no longer does because of higher interest rates, which reduces overall economic growth—the foundation for job-creation and prosperity. Not surprisingly, as government debt has increased, business investment has declined—specifically, business investment per worker fell from $18,363 in 2014 to $14,687 in 2021 (inflation-adjusted).

Risk of Inflation: When governments increase spending, particularly with borrowed money, they add more money to the economy, which can fuel inflation. According to a 2023 report from Scotiabank, government spending contributed significantly to higher interest rates in Canada, accounting for an estimated 42 per cent of the increase in the Bank of Canada’s rate since the first quarter of 2022. As a result, many Canadians have seen the costs of their borrowing—mortgages, car loans, lines of credit—soar in recent years.

Recession Risks: The accumulation of deficits and debt, which do not enhance productivity in the economy, weaken the government’s ability to deal with future challenges including economic downturns because the government has less fiscal capacity available to take on more debt. That’s because during a recession, government spending automatically increases and government revenues decrease, even before policymakers react with any specific measures. For example, as unemployment rises, employment insurance (EI) payments automatically increase, while revenues for EI decrease. Therefore, when a downturn or recession hits, and the government wants to spend even more money beyond these automatic programs, it must go further into debt.

Government debt comes with major consequences for Canadians. To alleviate the pain of government debt on Canadians, our policymakers should work to balance their budgets in 2025.

Tegan Hill

Director, Alberta Policy, Fraser Institute

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Nobel Prize-winning economist Milton Friedman in an interview on CSPAN, Sept. 30, 2000

From the Daily Caller News Foundation

By Stephen Moore

Shortly before his death in 2006, I had the privilege of interviewing Milton Friedman over dinner in San Francisco. The last question I asked him was: What are the three things we had to do to make America more prosperous?

His answer I have never forgotten: “First, allow universal school choice; second, expand free trade; third and most importantly, cut government spending.” That was long before Presidents Barack Obama and Joe Biden came along.

There are not too many problems in America that cannot be traced back to the growth of big and incompetent government.

It is notable that the two big bursts of inflation during modern times both occurred when government spending exploded. The first was the gigantic expansion of the LBJ “war on poverty” welfare state in the 1970s with prices nearly doubling, and then the post-COVID era spending blitz in the last year of Trump and then the Biden $6 trillion spending spree with the CPI sprinting from 1.5% to 9.1%.

Coincidence? Maybe. But I doubt it.

The connection between government flab and the decline in the purchasing power of the dollar is obvious. In both cases the Washington spending blitz was funded by Federal Reserve money printing. The helicopter money caused prices to surge. (I still find it laughable that 11 Nobel prize-winning economists wrote in the New York Times in 2021: Don’t worry, the Biden multi-trillion-dollar spending spree won’t cause inflation.)

The avalanche of federal spending hasn’t stopped even though COVID ended more than three years ago. We are three months into the 2025 fiscal year and on pace to spend an all-time high $7 trillion and borrow $2 trillion. If we stay on this course, the federal budget could reach $10 trillion over the next decade.

This road to financial perdition cannot stand. It risks blowing up the Trump presidency.

Upon entering office, Trump should on day one call for a package of up to $500 billion of rescissions — money that the last Congress appropriated but has not been spent yet. Cancelling the green energy subsidies alone could save nearly $100 billion. Why are we still spending money on COVID?

We could save tens of billions by ending corporate welfare programs — such as the wheel barrels full of tax dollars thrown at companies like Intel in the CHIPS Act. The Elon Musk Department of Government Efficiency is already identifying low hanging fruit that needs to be cut from the tree.

Along with extending the Trump tax cut of 2017, this erasure of bloated federal spending is critical for economic revival and for reversing the income losses to the middle class under Biden.

This is especially urgent because the curse of inflation is NOT over. Since the Fed started cutting interest rates in October, commodity prices are up nearly 5% and the mortgage rates have again hit 7% — in part because the combination of cheap money and government expansion is a toxic economic brew — as history teaches us.

Nothing could suck the oxygen and excitement out of the new Trump presidency more than a resumption of inflation at the grocery store and the gas pump. Trump’s record-high approval rating will sink overnight if the cost of everything starts rising again.

Cutting spending won’t be easy. The resistance won’t just come from Bernie Sanders Democrats. Trump will have to convince lawmakers in his own party — many of whom are already defending green-new-deal pork projects in their districts.

This is why Trump should make the case in his inaugural address that downsizing government is the moral equivalent of war. Borrow a line from Nancy Reagan: just say no — to runaway government spending. Say yes to what Friedman titled his famous book: “Capitalism and Freedom.”

Stephen Moore is a visiting fellow at the Heritage Foundation. His new book, coauthored with Arthur Laffer, is “The Trump Economic Miracle.”