Why debt matters

Debt is a key topic this election

One of the most important topics up for debate in the upcoming Federal elections will be whether Canada needs to run deficits or move towards minimizing spending and balancing the Federal Budget.  

Deficits occur when the government spends more money than it generates in revenue. A balanced budget, which usually leaves a surplus, occurs when spending is less than or equal to the revenue collected. As reported by the Canadian Press in 2018, a report from the federal Finance Department projected that the federal budget won’t be balanced until 2040 (21 years after the Liberals promised).

Both the Conservative and Green Parties of Canada have promised to balance the budget within 5 years, while the NDP’s stance still remains unclear. This brings up an important question, why is it important to have a balanced budget? 

Economic recession

One of the reasons a balanced budget is prioritized is because there is always a risk of having to face an economic recession. There is no doubt that when major global recessions (such as the financial crisis of 2007) occur, they cause significant problems for all the impacted economies.

This is evident in lower spending, higher unemployment rates, lack of investments and capital expenditure. These things inevitably lead to lower government revenue. At such a time, it almost becomes a necessity to run deficits, which are added to the national debt.  

Running deficits

However, running deficits in moderate economic situations is a totally different case. It just adds to the total debt, leading to increased amounts of yearly interest payments. When recession strikes, the whole problem worsens and leaves the economy in a vulnerable situation. In these cases, there is no saved money, and interest payments continue to increase.  

Now compare that with a balanced budget, or a budget with a surplus. In the case of the latter, the government will actually save money every year which they can decide how best to spend. This could go towards saving for a rainy day or an economic recession. It could even go towards paying off some debt, decreasing interest payments and protecting industries from emerging trade wars. The point is, by balancing the budget, the country can gain a strong foothold in the event of unexpected catastrophe.    

Interest payments 

Another key problem with running deficits is the increase in interest payments. This simply means that more money is given to the wealthy people who lend the money. The current amount of interest payments is over $28 billion every year. And just for the sake of comparison, in 2018, Canada’s budget for defence was $25 billion. All these interest payments are paid by taxpayers.

So, if, in the future interest payments become too expensive, then the government would need to increase its revenue to pay them off. To up its revenue, the government has an easy and simple solution: increase your taxes. So ultimately, you or some future generation will have to pay for the cost of the deficits that are accrued today.  

Deficit Benefits

Are there any benefits to running deficits? Yes, there are, depending on your preference.  

As discussed above, running deficits is quite common for governments during a recession. The reasoning behind it is simple. By borrowing money, the government has more to spend on areas they believe are important. For instance, it can be on infrastructure, housing, roads; anything the government finds worthy. Investments can spur economic growth, increase services and create jobs. All of which are good signs for any economy.  

However, many benefits and services are only good in the short run. Deficits don’t just vanish. No matter how many part-time jobs are created, how many services are provided, if deficits are run, then there are still those key two issues. The question is whether the short term benefits of borrowing outweigh the existential threat of economic recession, the cost of increasing interest rates and the long term benefits of a balanced budget. 

For me, the answer is no.  

“Living within our means” is a common phrase used by some of the party leaders and I agree with it. Just because you can have something without having to pay for it immediately doesn’t mean that there is no cost for it. This is why debt matters. No matter what you spend borrowed money on, it is still borrowed money and generates a cost that needs to be paid. That cost will become evident at some point, not necessarily in our lifetime but maybe in our children’s lives — whether it is through higher taxes in the future, or cuts to important services. 

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Veer Gandhi

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