The federal government recently projected a $343 billion deficit for the current fiscal year.
Predictably, everyone seems to be freaking out. That’s not a surprise. $343 billion is a lot of money, especially if you aren’t used to thinking about government finances. Imagine taking out a $343 billion mortgage!
This has lead to all sorts of speculation about massive tax increases and cuts to public service. Some are even wondering whether we need to completely re-think how society works.
None of this is necessary, because government finances are not like personal finances.
I discuss this at length in Government Debt Should Not Keep You up at Night, and I won’t repeat all of the arguments made there. But I do want to address the idea that a $343 billion deficit will require some sort of great sacrifice in the future to pay it off.
$343 billion is a big number, but this is a one-time expense due to the pandemic. No one is proposing to increase government spending by this amount indefinitely.
This means that we only need to worry about paying the interest. The debt never has to be paid off. Economic growth and inflation will reduce its relative importance over time.
So how much will the interest payments be?
Thanks to the recent drop in interest rates, the government can now issue 30-year bonds that have a fixed interest rate of around 1%.
This means that the annual cost of $343 billion in additional debt is about $3.4 billion.
This still sounds like a lot, but to put it into perspective, one percentage point of federal GST brings in about $8 billion per year.
So, in isolation, an additional 0.4 percentage points of GST would be enough to pay the interest on this additional debt indefinitely.
Remember when the GST went from 7% to 5%? Did you notice? How big of a deal do you think a 5.4% GST would be?
The government could also increase income taxes by a tiny amount, or eliminate some tax credits. It could also run a small deficit of $3.4 billion (less that one-fifth of one percent of GDP) indefinitely, and the debt-to-GDP ratio would continue to fall.
Go ahead and question individual spending measures. It’s always good to debate the specifics.
But don’t buy into the sensationalism about the size of the deficit. Governments are not people, and this isn’t a mortgage.