Canada's Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters
Bradlee Whidden is a policy analyst for Western Canada at the Canadian Federation of Independent Business. Jairo Yunis is the director for British Columbia and Western economic policy at the CFIB.
In the wake of higher interest rates, declining gross domestic product (GDP) per capita and stagnant productivity, Canada finds itself grappling with a daunting fiscal reality: burgeoning deficits and ballooning debt. While government spending serves as a lifeline during crises, the unchecked expansion of deficits and debt outside of recessionary periods poses significant consequences for business investment, productivity, economic growth and Canadian prosperity.
Make no mistake, deficit spending is an addiction, and we are hooked.
Total provincial deficits have skyrocketed from $10.6-billion last year to $28-billion this year, with every province but Alberta and New Brunswick posting deficits. The federal government is no better, projecting deficits well above $20-billion every year until 2028-29, adding to a swelling national debt. In fact, total federal-provincial net debt as a share of our economy went from 53 per cent in 2008 to 76 per cent in 2024. In other words, if the economy produces $100 in output, the country’s total debt is worth $76, up from $53.
Or, to put it in simpler terms, each Canadian is on the hook for $55,000.
Yes, deficit spending provides flexibility during a crisis, offering relief without immediately needing to raise taxes. For example, the Canada Emergency Business Account (CEBA) and the Canada Emergency Wage Subsidy (CEWS) kept thousands of businesses afloat and employees working during the pandemic.
But we’re not in a crisis any more. We need to be responsible with our finances now to be in a better fiscal position when the next crisis arises.
When governments borrow money, they eventually have to pay it back, which means higher taxes or cuts to essential services in the future. Some argue, however, that deficit spending can fuel economic growth, allowing for larger debts without requiring tax increases or spending cuts, as the debt becomes a smaller share of a larger economy.
Nonetheless, even if all of Canada’s debt is growth-stimulating, which is highly doubtful, there is a limit to the amount the country can borrow. Bond markets impose these limits, demanding higher yields and returns as they perceive higher debt and frequent deficits as greater risks.
Plus, there’s the cost of interest on that debt, which means taxpayers are paying back both the original loan and the interest, with no real benefits. For additional context, in the current 2024-25 fiscal year, all the money to be collected from the goods and services tax (GST) across Canada just covers the $54.1-billion in annual interest payments on our national debt, which is more than what the federal government expects to spend on health care. Additionally, some provinces such as Manitoba and Newfoundland and Labrador are spending a little over $1 of every $10 in revenue in interest costs.
That’s money not being spent on the things that improve our quality of life and drive economic growth but instead goes into the pockets of bond holders.
Unsustainable debt and deficits also have an impact on investment and productivity. As the government borrows more money, it decreases the pool of available loans for businesses. This competition for funds drives up interest rates, making it more difficult and expensive for businesses to secure loans. As a result, businesses, now competing with the government for financing, struggle to access the loans they need to expand their businesses, increase wages and invest in the tools they need to make their workers more productive.
According to a July survey by the Canadian Federation of Independent Businesses, 47 per cent of Canadian small business owners report that borrowing costs are a significant challenge, up from the historical average of 24 per cent. Of course, this coincides with the Bank of Canada’s interest-rate-hiking campaign that started in March, 2022. But loose fiscal policy – while not the main culprit behind Canada’s investment woes and not unwelcomed when the moment had called for it – is now not helping to provide the necessary conditions for small businesses to access capital and grow.
Canada must confront its deficit addiction head-on. Acknowledging the problem is the first step. While deficit spending may offer a quick fix during times of crisis, the long-term consequences are debilitating. Governments need to limit their spending, cut subsidies for large businesses and pay down some of their debt.
Without solid fiscal anchors, our fiscal situation will become unmanageable. Both provincial and federal governments must tighten their purse strings and commit to stronger measures to control spending and borrowing.
The road to recovery may be challenging, but the alternative – remaining trapped in a cycle of debt dependency – is far more perilous. It’s time for Canada to begin its journey toward fiscal sobriety, ensuring a healthier, more vibrant economy for all.