Debt, Taxes and Tails Wagging Dogs

A short, non-path-breaking post today –

I am more than old enough to remember when Canada’s GST was born, a great (or not) new source of revenue to fund government programs. A fact about Canada that it shares with the US but no European advanced economies is that Canada’s federal government gets almost exactly half of its revenues from the personal income tax. Same for the US, but the Europeans get much less than that, relying more on consumption taxes and VAT.

Well, the most recent Liberal government budget breaks some new ground, apparently. From The Hub –

For the first time in 12 years, government debt costs will surpass GST revenue

• Projections from budget 2024 now show both revenues from the GST and public debt charges match each other at $54.1 billion.
• The federal government could spend as much as $64 billion on charges for public debt by the end of the decade.
• In future years, the government estimates GST revenues won’t cover its public debt charges. In 2028-29, the GST is projected to generate $61 billion in revenue. Meanwhile, public debt charges will reach $64 billion.

In case you’re not familiar with government-speak on budgets, ‘public debt charges’ refers to the amount the government pays out in interest on what it has previously borrowed. So, know that when you pay the GST on anything you buy, those dollars are going to people (or banks, more likely) who bought Canadian government bonds at some point in the past.

It is not at all fashionable in most Western countries these days to worry about government deficits. Government borrowing is thought to be a perfectly sensible means of providing important government programs that do good things for people. However, the above figures point out that there is one eventual consequence of this policy. Continuing deficits add to the total amount of government bonds outstanding, bonds which must be redeemed or rolled over down the road and the interest on them paid out, also using government funds. Thus, ‘servicing the public debt’ becomes a larger and larger line item in total government spending, until, as noted, one must raise increasing amounts of revenue (or further increase borrowing) in order to pay off the previous borrowing. Eventually the spending on servicing that debt can become the tail that wags the dog of government spending. It necessarily makes it harder to spend on other government programs.

Pipers must be paid, either with more borrowing, higher taxes, or reductions in other spending. …or, governments can always print money, but that’s a topic for another day.