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'Til debt do us part? - With a plan Ottawa's debt can be eliminated

By Adam Taylor
web posted October 23, 2006

Finance Minister Jim Flaherty recently revealed last year's federal surplus was $13.2-billion. The government immediately announced the entire amount would be put toward reducing Canada's national debt. This was a good move, but a much more concentrated effort will be required to eliminate the half-trillion dollar debt successive governments have rung up since the 1960s.

The new Conservative government and previous Liberal government should both be commended for paying down $81.4-billion of Canada's national debt over the last nine years. As a result, billions of dollars are saved every year
on reduced interest costs. However, Ottawa must go further by shifting from its record of debt elimination by accident to debt elimination by design. With the national debt standing at $481.5-billion, Canada cannot afford to not take debt repayment seriously.

Last year, Ottawa spent $33.8-billion on debt servicing. Another $34.8-billion will be spent on interest this year. That works out to $95-million a day. Paying the interest on Canada's national debt is the federal government's single largest expenditure. That's right, Ottawa spends more on interest charges than it spends on any other big ticket budget item like senior entitlements, health care or national defence. Every dollar that goes toward debt interest is one less dollar for health care, infrastructure, pensions for seniors, or tax relief. In other words, Canadians today are paying for yesterday's fiscal recklessness. Without a change of course our kids and grandkids will be paying the interest on yesterday's spending.

Taking debt elimination seriously will help ensure future generations are not saddled paying for past program expenditures. Debt elimination also frees up tax dollars. By paying down $13.2-billion in debt, the federal government will save over half a billion dollars in debt interest payments it is no longer required to make. This is a savings of over $500-million each and every year.

Between 1961 and 1996, Canadian governments spent more money than they could afford, piled up budgetary deficits, and increased the national debt from $14.8-billion to $562.9-billion in 1996. Since 1961, interest and service charges on the debt has cost taxpayers almost $1-trillion. That's twelve zeros after the $1 folks. This figure will continue to increase until the debt is eliminated.

With a dedicated effort, paying off Canada's national debt is possible and it should be made law. Yes, it is an immense task but it could be done if Ottawa added a mandated debt repayment line-item in each budget. The Canadian Taxpayers Federation (CTF) first advocated such a policy in 1997, one year ahead of the budget being balanced. Today, we recommend a phased-in line item worth 5 per cent of revenues, which would begin next year at 1 per cent of revenues and increase by 1 per cent a year until a full 5 per cent debt elimination schedule is reached. That would guarantee a debt repayment of $2.4-billion next year, rising to $13.3-billion by 2011. Ottawa's current policy on reducing the national debt is to do so only if a surplus exists at year end. If there is no surplus, the debt is not reduced.

As of April 1, 2004, Alberta became Canada's only debt-free province. This was accomplished the old fashioned way: restrained spending and through steady resolve - the province passed CTF-inspired legislation to eliminate its debt. The same ingredients should be applied in Ottawa to wipe away Canada's debt. Assuming revenue growth of three per cent a year, and by dedicating 5 per cent of revenues to debt relief, Ottawa could be debt-free by 2034, less than thirty years away. It could be done even faster if the federal government began the sale and divestiture of Crown assets - many of which were acquired in times of budget deficits.

Focusing greater attention on paying off the debt would have other immediate benefits. As the national debt declined, significant savings would be realized through reduced debt interest payments. That money could be used for a variety of things - tax relief or additional spending for health and pension benefits in response to rising demand from retiring baby boomers.

Since the books were first balanced almost ten years ago, politicians have once again ramped up spending and made multi-billion dollar surpluses seem like a sign of fiscal competence. Debt repayment has become an afterthought. This is a mistake. With the political will and a plan, Canada's debt could be eliminated. This would be good for all - it would tackle yesterday's mistakes head on, and ensure that we don't completely handcuff and sell out the taxpayers of tomorrow. ESR

Adam Taylor is research director of the Canadian Taxpayers Federation.

 

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