Opinion

There was a glaring omission in this week's fall economic statement from the Trudeau government: it doesn’t say how hundreds of billions of dollars in new federal debt will be repaid.

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There was a glaring omission in this week's fall economic statement from the Trudeau government: it doesn’t say how hundreds of billions of dollars in new federal debt will be repaid.

The 226-page financial update, released Monday by Finance Minister Chrystia Freeland, outlines a wide range of ambitious spending plans over the coming years. Much of it is to pay for COVID-19 pandemic costs, including damage caused by punishing economic shutdowns. Some of it is designed to address longstanding inequities faced by women and minority groups.

The Liberal government wants to use the economic recovery to "build back better."

Those are laudable goals, but without a sustainable framework to pay for it, the Trudeau government is creating inter-generational inequity: it is saddling future generations with crushing levels of debt.

Ottawa’s fiscal intervention during the novel coronavirus pandemic was crucial to avoiding a deep and prolonged recession. Without it, Canadians would surely have suffered years of double-digit unemployment and record bankruptcies. The roll-out of some of those programs was clumsy and could have been better designed, but the need to get money into the hands of consumers and businesses as quickly as possible was critical.

The question now is: how do Canadians pay for it?

Minister of Finance Chrystia Freeland gets a fist bump from Prime Minister Justin Trudeau after delivering the 2020 fiscal update on Monday. (Sean Kilpatrick / The Canadian Press files)

THE CANADIAN PRESS

Minister of Finance Chrystia Freeland gets a fist bump from Prime Minister Justin Trudeau after delivering the 2020 fiscal update on Monday. (Sean Kilpatrick / The Canadian Press files)

Does Ottawa return to balanced budgets once the economy has recovered and start chipping away at the debt (expected to hit $1.1 trillion next year, up from $721 billion in 2019-20)? Or does it keep running deficits and allow debt to climb to a projected $1.4 trillion by 2025-26?

The Trudeau government has chosen the latter.

The Liberals are promising time-limited deficits (though they don’t say exactly when they plan to balance the books). This year’s projected $381.6-billion shortfall is expected to decline to $24.9 billion by 2025-26, according to the fall economic statement. Debt will rise from 31 per cent of GDP in 2019-20 to an estimated 55.5 per cent in 2023-24.

That’s historically high, but still less than it was in the 1990s. More importantly, Liberals argue, today’s rock-bottom interest rates will ensure debt servicing costs remain at, or near, one per cent of spending. (It was more than six per cent in the 1990s.)

Even if interest rates climb in the coming years, taxpayers will be insulated from higher debt costs because government is shifting to more long-term borrowing, the Trudeau government says: "Government is taking advantage of these historically low rates to lock in debt at affordable rates for decades to come."

It seems borrowing conditions are so favourable, Prime Minister Justin Trudeau is convinced there’s no limit to how much he can spend. It’s as if he’s found his own Rumpelstiltskin.

There are two problems with this scenario.

Nothing in Finance Minister Chrystia Freeland's 226-page financial update offered clues on how the hundreds of billions of dollars in new federal debt will be repaid. (Sean Kilpatrick / The Canadian Press files)

CP

Nothing in Finance Minister Chrystia Freeland's 226-page financial update offered clues on how the hundreds of billions of dollars in new federal debt will be repaid. (Sean Kilpatrick / The Canadian Press files)

First, the prime minister has a poor record of keeping his balanced budget commitments. Trudeau pledged in 2015 he would run three years of $10-billion deficits, followed by a balanced budget in 2019. He posted four years of growing deficits instead, ending with a shortfall of $39.4 billion in 2019-20 (of which $7.2 billion was related to fighting COVID-19). That was during relatively good economic times.

Considering Trudeau’s fiscal record, that trend will likely continue.

The second problem is government’s claim it can borrow more because of today’s lower interest rates.

To its credit, the federal government is increasing the proportion of 10-year and 30-year bonds it plans to issue. That will lock in low rates for those periods, but more than 70 per cent of federal bonds issued this year are expected to be in the range of two to five years.

Government plans to shift more borrowing to long-term bonds over time, but Ottawa will still have short-term debt that has to be refinanced, likely at higher rates. As it is, debt financing charges are projected to increase from $20.2 billion this year to $34.3 billion in 2025-26. That could climb rapidly if interest rates rise.

There is no such thing as free money. Government can’t spin straw into gold.

The belief government can pile up record levels of debt without impacting future generations is a fairy tale.

tom.brodbeck@freepress.mb.ca

Tom Brodbeck

Tom Brodbeck
Columnist

Tom has been covering Manitoba politics since the early 1990s and joined the Winnipeg Free Press news team in 2019.

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