Do deficits matter? Here’s what they are, and what they mean for your bottom line

Click to play video: 'Budget 2021: Freeland says Canada’s ‘spending is necessary’'
Budget 2021: Freeland says Canada’s ‘spending is necessary’
WATCH: Budget 2021 — Freeland says Canada's 'spending is necessary' – Apr 19, 2021

As Canadians stare down the barrel of yet another federal election campaign, they’re forced to think about the kinds of topics that they wouldn’t normally consider in their day-to-day lives — like economics.

But while some Canadians’ eyes may glaze over at the mere mention of the debt and the deficit, that doesn’t mean it doesn’t affect them.

Global News took a closer look at national debt and deficits and tried to make them more digestible. Here’s what you need to know.

Are the deficit and the debt the same?

While the deficit and the debt do affect each other, they aren’t the same thing.

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“If, basically, you spend more than you take in, you have a deficit. If you take in more than you spend, you’re going to have what’s referred to as a surplus,” explained Livio Di Matteo, an economics professor at Lakehead University.

“And once you start to accumulate these deficits, that becomes the debt.

So if you were the federal government, and you spent more on beer and pretzels than you actually had in your bank account, the difference between what you spent and how much money you had would become the deficit. And as that deficit piles up over the years, it becomes the debt.

Click to play video: 'Budget 2021: What’s behind the government’s eye-popping deficit spending?'
Budget 2021: What’s behind the government’s eye-popping deficit spending?

While Canadians get a paycheque that determines what they spend, the government gets tax revenues it can then spend on things like programs and services. But if its spending outpaces the revenue it’s bringing in, they have to borrow money to cover the gap between the money coming in and the money going out.

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“The total debt that we have is the accumulation of all of our past borrowing activities,” said Trevor Tombe, an associate professor of economics at the University of Calgary and a research fellow at The School of Public Policy.

Canada’s federal debt levels are currently a little over $1.1 trillion, according to Tombe. The deficit for the last fiscal year, meanwhile, was $314 billion — a massive jump from the $21.77 billion deficit from the fiscal year before that, mostly due to the piles of cash Ottawa had to spend on fighting the COVID-19 pandemic.

Will my grandkids have to pay the debt?

You may have heard the line before: a baby born today is saddled with their share of the federal bill. In today’s case, it would be over $28,000 worth of debt.

But while that level of debt might be accurate if the baby’s first act out of the womb is to buy a designer purse or watch, it doesn’t pass the sniff test in the context of the federal debt.

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When an individual takes out a loan, they’re eventually expected to pay it back — with interest, usually. But that’s not exactly how it works for governments.

“Unlike individuals, where you take out a loan and then there is a date that you need to repay it or things like that … that’s not the case for governments. It’s also not the case for large corporations, too, that can borrow over long spans of time and not necessarily ever really repay the principal,” said Tombe.

“And that means we should think about the cost of carrying and servicing the debt.”

Governments don’t really ever have to think about paying off the total sum of their debt, or face an actual debt collector. Instead, governments need to consider the costs involved with carrying that debt, including the interest, and any debt servicing costs.

That’s where we get into something called the debt-to-GDP ratio, which is how much debt Canada carries versus how much money we can make from everything within our borders in any given year.

“This is just like when an individual tries to get a mortgage: the bank is going to look at the amount that they’re borrowing, relative to their income, as a measure of whether the debt is too high or too low,” Tombe said.

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“In Canada’s case, our debt-to-GDP level is about 48 per cent, and relative to where we’ve been historically or where other countries are right now, that’s actually on the lower side.”

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Nearly half of Canadians can’t cover living costs this year without going into debt: Survey

So long as Canada’s ability to shoulder its debt stays relatively stable, Canadians shouldn’t have to worry about the downsides of debt spiralling out control — like being hit with massive tax hikes or cuts to services.

“As long as you can pay the interest on the debt, in a sense, the national debt is not necessarily a problem,” said Di Matteo.

Does accumulating debt matter?

Governments don’t just walk into a bank and ask for a loan of $314 billion — but they do sell bonds to investors, which Tombe said “typically require regular payments over time.”

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“Those payments are like interest charges on a loan that you or I would take out,” he added.

Right now, the interest on any money that Canada borrows is at a historic low: 0.25 per cent. That means the government can borrow money for cheap, and as long as someone is willing to take on the debt — whether it be the central bank or foreign money holders — “you’re going to probably be just fine,” Di Matteo said.

But that won’t last forever, he warned.

“The concern, of course, is what happens with interest rates go up, because then as the debt starts to roll over, you are paying more to service the debt,” Di Matteo said.

Click to play video: 'Bank of Canada warns Canadians need to be ‘prudent’ when taking on household debt'
Bank of Canada warns Canadians need to be ‘prudent’ when taking on household debt

The government regularly reassures Canadians about the debt by pointing out that interest rates are much lower than economic growth rates. Still, even if that’s true now, Tombe warned that it doesn’t mean we can ignore the long-term trajectory.

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“The prudent approach is somewhere in the middle, where we recognize that there is a burden of debt, it’s spread through time,” he said.

“And we do need to think long term about bringing those debt levels down to pre-COVID levels at some point.”

Why should I care?

Whether we like it or not, what happens to the federal debt can actually have very real consequences on our daily lives.

While Canadians won’t suddenly find a $28,000 bill in their mailbox because the government’s debt due day hits, the percentage of revenue that has to be spent servicing the debt could go up as interest rates rise, debt accumulates or revenues fall — and that’s when it affects Canadians’ lives.

“The interest costs that we’re facing this year federally are about $22 billion,” Tombe said.

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“What it basically means is that about six per cent of total federal revenues go towards covering the interest on the debt.”

That means for the average Canadian, six per cent of what you pay in taxes is actually covering the interest on debt.

“That’s a more appropriate way to think about it than every Canadian being on the hook for their share of $1.1 trillion, because there isn’t a point where that needs to be repaid,” he said.

Still, if the debt keeps going up and the revenues don’t, this figure could change. And if a higher percentage of the government’s piggybank is being spent paying off costs associated with its debts, a number of things could happen.

You could end up paying a slightly higher percentage of GST on the things you buy. Your taxes could go up. Services could be slashed. And while many Canadians might not notice these changes happening in tandem with rising debt, it doesn’t mean it isn’t happening.

“It’s often hard to connect specific fiscal pressures with actual government programs that affect you on your day-to-day life,” Tombe said.

“But it’s there in the background.”


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