Parliamentary Budget Officer Yves Giroux prepares to appear before a committee in Ottawa on June 13, 2022.Justin Tang/The Canadian Press
The phrase “debt wall” has always been a bit misleading, conjuring up an image of something that suddenly appears from the mist. But a wall doesn’t just materialize; it’s built brick by brick. And the fiscal crisis of a debt wall doesn’t happen instantly; it builds over years.
The building blocks of a debt wall are starting to pile up in federal finances, emerging from the most recent analysis by the Parliamentary Budget Officer, ahead of a budget update from the Liberals expected next month.
The most obvious is the sharp growth in the dollars spent on servicing the federal debt since the onset of the pandemic, and an unprecedented surge in borrowing. In fiscal 2019, debt charges were $23.3-billion; the PBO projects that Ottawa will pay nearly double that, $46.4-billion, in the current fiscal year, rising to $51.1-billion in five years.
That trajectory assumes no new major spending from the Liberals, the very opposite of a safe bet. The government has consistently larded extra billions of dollars in spending into each fiscal update and budget it tables. And this year, the NDP is pushing hard for a national pharmacare program, a key part of the party’s parliamentary alliance with the Liberals.
The price tag for such a program would be $11.2-billion in fiscal 2025, rising to $13.4-billion by fiscal 2027, according to the PBO. Ottawa might be able to reduce that cost by convincing the provinces to shoulder some of the burden; good luck with that, when the premiers are already crying poor over health care funding.
The cost of pharmacare alone would be enough to triple the federal deficit in fiscal 2025.
Even without such added expenses, the cost of servicing the debt is headed into the danger zone, as long-term interest rates seem likely to settle at higher levels. Two years ago, former Bank of Canada governor David Dodge suggested that Finance Minister Chrystia Freeland adopt a new fiscal anchor that would aim to keep Ottawa’s debt-servicing costs below 10 per cent of revenue. Above that threshold, he argued, the cost of debt would start to eat up too much fiscal capacity.
The figures in the latest PBO report, although yet to be confirmed by the Finance Department, show debt charges jumping to 10.1 per cent of revenue in this fiscal year, up sharply from 7.9 per cent last year.
Despite the increase, the ratio is well below the red-line levels of the mid-1990s, when debt charges ate up more than a third of Ottawa’s revenue. But it’s headed in the wrong direction, and that rise will accelerate if – more likely, when – the Liberals bend to the NDP’s demands for much higher permanent program spending.
The rising cost of the federal debt is cutting into Ottawa’s fiscal flexibility. So is the rising cost of running the government, which has soared as the Liberals bulk up the bureaucracy year after year. When the Trudeau government took power in 2015, the government’s combined operating and capital amortization expenses were projected to be $81.8-billion. Those figures exclude Ottawa’s transfers to individuals and other levels of government.
This year, Ottawa’s administrative costs are forecast to hit $133.9-billion, a 64-per-cent jump. Put another way, if the Liberals had simply increased those costs in line with inflation, they would have more than $30-billion to spend – or, heaven forfend, to save.
When poked by the opposition Conservatives on overspending, the Liberals habitually taunt their rivals with the question of what programs the Tories would cut.
Here is their answer: stop padding the cost of government, institute a hiring freeze and start to claw back some of the $52-billion that’s been added to the cost of government under the Liberals.
The government has made a small step in this direction with its effort to “refocus” $4.6-billion a year in permanent spending. But that exercise avoids pruning the size of the federal civil service, the biggest source of potential savings.
There is one fiscal guardrail that is relatively intact: the size of the federal debt relative to the economy. Give or take a decimal point, that ratio is largely in line with the government’s pledge to keep it on a downward trajectory. But that is true largely because the inflationary surge of the past two years has pushed up the nominal size of the economy.
Even that modest success will be at risk if the Liberals accede to the NDP’s demands for major new outlays – one more brick in the debt wall that is rapidly assuming shape.