Government Debt VS Unfunded Liabilities
It
is important to note that some people prefer a broader definition of government
debt to include all future government liabilities, such as pension payments,
that the government has contractually agreed to, but not yet paid. While these
are certainly a form of debt, we choose to classify them separately as unfunded
liabilities. In many ways, these unfunded liabilities present a greater burden
to future generations than all government debt combined.
Dangers of Government Debt
So
now that we have a basic understanding of what government debt is, let’s
explore the consequences of government taking on too much debt. The primary
concern has its origin in the very nature of the debt itself. When a government
takes on debt to finance its expenditures, it receives money from external
investors. It does this through the sale of Government Bonds. These bonds
provide the government with money up front, but require the government to pay
back the investor the principal of the investment plus a predetermined amount
of interest. This works not unlike a loan you may take out from a local bank to
pay your school expenses or to finance a new car purchase.
The Interest Rate Trap
As
a government’s national debt increases over time, so too do the interest
payments needed to “service” the debt. The increased money needed to pay
interest on the debt makes it even harder for a government to raise enough
revenues to meet their expenditures. This leads to more borrowing, greater
amounts of debt and even higher interest payments. This compounding cycle
continues until a government manages to balance its budget or defaults on its
financial obligations.
To
comprehend the size of the problem here in Canada, consider the fact that our
federal government alone spends over $26 billion a year on interest payments.
The Canadian government spends more to simply maintain our current levels of
debt each year than on our entire military budget. Previous generations have expanded
entitlements without paying for them, and are now leaving future generations
with the bill.
