The trend of growing deficits is unsustainable, which means it will end. Photo by Getty Images/iStockphoto

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According to the IMF, our various governments’ combined gross debt is 113.9 per cent of GDP. In 1990, at the beginning of a decade that came to be dominated by a debt crisis, it had been just 73.7 per cent. The deficits projected in the 2025 federal budget will take our gross debt even higher. The trend is unsustainable, which means it will end.

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Its end will come when the government’s taxation and borrowing capacity is exhausted and revenues don’t cover the cost of running the government and paying interest on the debt. As we approach this point, our credit rating will fall and the interest rate we pay will rise, worsening the problem. In the end, there will be no bids at our bond auctions. We will have no choice but to declare bankruptcy.

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Argentina shows what happens next. Bond-holders, politicians and financial experts meet to work out a deal. Bond-holders accept reduced payments at a level the government can afford to pay, which causes the bonds’ value to fall. Bond-holders accept this “hair cut” because it gives them at least some return on what turned out to be a bad investment. They will also lend us the money to pay our debt interest and thus re-start our normal participation in the global bond market. In exchange, however, they will force economic reforms on us designed to prevent future such bankruptcies.

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Foreigners aren’t the only ones who suffer financial losses, of course. Our banks and investment companies hold government bonds as backing for their customers’ deposits. Their losses ultimately are borne by their customers. The same is true for companies that sell life and property insurance, which by law must be backed by government bonds believed to be safe.

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A second class of costs comes from the reforms imposed by agencies like the IMF, rather than chosen by parliamentarians in touch with Canadians’ needs and preferences. Many of us will also consider it a cost that our country has lost its reputation as a reliable member of the world’s financial community.

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It wasn’t so long ago that the federal government came close to bankruptcy. Persistent deficit spending during the 1980s caused the all-government debt-to-GDP ratio to rise from 44.6 per cent in 1980 to 94.2 per cent in 1993. In 1994 our credit rating was lowered and at one auction federal government bonds attracted no bids until 30 minutes before the end. The Wall Street Journal called Canada “an honorary member of the Third World.”

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Bankruptcy was avoided because in 1993 voters concerned about deficits and debts had elected 51 members of Preston Manning’s Reform Party, which ran on a platform of fiscal austerity and became the unofficial opposition in Parliament. I was one of those Reform MPs, on leave from teaching economics at Simon Fraser University, and served three years as the shadow minister of finance. I can testify that polls showing that without small-r reform capital-R Reform would win the next election convinced the Liberal government to balance the federal budget.

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The 1995 budget introduced important spending cuts. In a speech on the floor of the House I praised the budget and awarded it a professorial A-, noting that it would have received an A+ if it had been adopted earlier. I also praised the Liberals’ willingness to accept the political risks that always accompany spending cuts. The austerity policies begun in the 1995 federal budget helped reduce the debt-to-GDP ratio from 94.2 per cent in 1993 to 67.2 in 2007.