Deficit spending is no free lunch; it’s a bill to future taxpayers
The federal government ran a $19.4-billion budget deficit in 2017-18, according to its fiscal monitor. 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 common again, it’s easy to grow complacent. After all, deficit spending can seem like a free lunch – the government spends money without the immediate cost of raising taxes to pay for it.
In reality, when the government spends more than its tax revenue allows, it must finance the additional spending through debt. One cost of borrowing is the annual interest paid on the debt – currently $26.3 billion for the federal government. Of course, the debt’s principal eventually must be repaid – a cost that will be borne by future taxpayers.
To get a better sense of the magnitude of the federal deficit, consider what it would take for the government to finance all its current spending with higher taxes today rather than kicking the tax bill down the road. What would tax rates have to be to cover the government’s expected $18.1-billion deficit for 2018-19?