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Deficit spending not a free lunch

Deficit spending not a free lunch

Source: The Fraser Institute
Authors: Charles LammamHugh MacIntyre

It’s official. According to the federal government’s fiscal monitor, Ottawa ran a $19.4 billion budget deficit for 2017/18. And this government’s appetite for deficit spending shows no signs of relenting. In fact, there’s no plan to balance the federal budget for the next three decades.

With deficits becoming common place again, it’s easy to grow complacent. After all, deficit spending can seem like a free lunch—by running deficits, the government spends money without the immediate cost of raising taxes to pay for it.

In reality, however, when the government spends more than its tax revenue allows, it must finance the additional spending through debt (i.e. by borrowing). One cost of borrowing is the annual interest paid on the debt—currently $26.3 billion for the federal government alone. Of course, the debt’s principal eventually must be repaid, too—a cost that will be borne by future taxpayers.

To get a better sense of the magnitude of the current federal deficit, consider what it would take for Ottawa to finance all its current spending with higher taxes today rather than kicking the tax bill down the road. In other words, what would tax rates have to be to cover the Trudeau government’s expected $18.1 billion deficit for 2018/19?

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