November 22, 2023

Weekly EconMinute—Fiscal sustainability

In this week’s EconMinute, we’re talking about fiscal sustainability of the federal government.

It’s not just households that are burdened with hefty debt payments; the same is true of the federal government. With interest rates high, many wonder if government finances are, or will be, stretched too thin. As such, all eyes were on the 2023 Fall Economic Statement (FES) for insight into the government’s fiscal sustainability.  

Though there are a variety of ways to assess the government’s financial health, we focus on one key metric for our analysis: the cost of servicing outstanding government debt, expressed as a percentage of government revenues.

One way to think of this measure is with respect to personal finances. This would be the equivalent of the percentage of your household’s income spent on debt servicing (e.g., a mortgage, car loan, and minimum payments on a credit card). The more money spent on debt, the less there is to spend on other things—without piling on even more debt.

So what did the latest update reveal about Canada’s fiscal sustainability?

  • According to the FES, payments on debt remain in line with what was anticipated in Budget 2023 for Fiscal Year 2022/23: at 7.6% of revenues.
  • However, the FES expects these payments to grow more sharply over time. As of Fiscal Year 2027/28, they are expected to reach 10.3% of revenues, compared with 9.1% expected in Budget 2023.   
  • The faster increase over the projection horizon is because debt payments are set to grow more significantly while revenues will not. In other words, to stabilize this measure would require a tax increase (to increase revenue) or spending cuts (to curb additional debt).
  • To put this in perspective, this 10.3% is 2.2 percentage points or 27% above Budget 2019 expectations and in line with levels as of 2013. Though this might not sound like a lot, it would amount to around $12 billion dollars every year that could be spent elsewhere.
  • That said, the outlook remains considerably better than the early 1990’s when the federal government spent over 30 cents of every dollar it collected in taxes on debt payments.  

What can we learn from this quick assessment? First, Canada’s fiscal state is far from dire. Debt eats up about 10% of government revenues, a far cry from the financial reality of the 1980’s and 1990’s. Still, the trajectory is not encouraging. Furthermore, in the absence of a fiscal anchor with sufficient stringency, there may be a temptation to push the bounds of sustainability—just enough with each budget and fiscal update—until we reach the tipping point.

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