Deficit Spending No Free Lunch

By Lammam, Charles; MacIntyre, Hugh | Winnipeg Free Press, June 12, 2018 | Go to article overview

Deficit Spending No Free Lunch


Lammam, Charles, MacIntyre, Hugh, Winnipeg Free Press


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 commonplace 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?

Let’s start with personal income taxes, the largest single source of revenue for the federal government. According to the Parliamentary Budget Office’s (PBO) tool for calculating the revenue impact of tax changes, to cover the current federal deficit, the government would need to raise all five personal income tax rates by two percentage points — at a cost to taxpayers of $18.3 billion. In this scenario, the bottom personal income tax rate would increase from 15 per cent to 17 per cent, and the top rate from 33 per cent to 35 per cent.

These tax hikes would discourage Canadians from working, saving, investing and being entrepreneurial — all activities that help spur economic growth. And they would push our already high combined federal and provincial top rates to even higher levels, weakening our already weak competitive position internationally.

Corporate income taxes comprise the second-largest revenue source for the federal government. …

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