OP-ED: Canada’s GST was meant to tame the debt. Now it barely covers the interest

"The GST was sold to Canadians as a way to balance the budget, but today it mostly pays the interest on Ottawa’s debt."

Source: Adobe Stock

Author: Lee Harding

Canada’s Goods and Services Tax now effectively serves one purpose: helping to pay interest on the federal debt. And, thanks to continued deficit spending, these revenues aren’t quite enough to cover the entire cost. This should be a fiscal wake-up call for the federal government and all Canadians.

The 2025 budget revealed the problem. GST revenues and interest payments on the debt were both about $61 billion. By 2029-30, the GST will take in $64 billion, but interest payments on the debt will reach $76 billion. Without a slash in spending or an increase in the GST rate to six or seven per cent, this gap will remain indefinitely.

This milestone, perhaps better called a millstone, is even more significant when we look back on the last few decades of political history. After all, the GST was sold to Canadians as a way to balance the budget.

Under Pierre Trudeau, the Liberals ran many deficit budgets, causing a snowball of increasing interest payments. By the time the Brian Mulroney Progressive Conservatives came along in 1984, a return to balance was a favourite political topic. When the government replaced the 8.5-per-cent hidden manufacturers’ sales tax on goods produced in Canada with the seven-per-cent GST, Finance Minister Brian Wilson pledged, “All GST revenues will be allocated solely to the effort to bring the public debt under control.”

The statement implied the GST would not just eliminate annual deficits (meaning an annual balanced federal budget) but also run surpluses to reduce the accumulated debt.

Admittedly, this was political spin. All federal taxes go into one big pool of money. It’s also hard to say what “under control” really means, but it does imply the debt was out of control prior to the introduction of the GST in 1991. Sadly, the Mulroney government never did balance the budget. So much for bringing the debt “under control.”

In 1993, the Reform Party ate the Progressive Conservatives’ lunch on a platform of debt repayment, while the Chrétien Liberals won a majority. The Liberals floated the idea of tax increases, but a national Axe the Tax tour sponsored by the Canadian Taxpayers Federation proved that a nation already upset with the GST had no appetite for more taxes. This empowered the Liberals to slash spending and do what the GST had not. They finally balanced the budget.

The federal government reduced its direct spending and its transfers, forcing provinces and municipalities to tighten their belts. Austerity was necessary and helpful. After sliding for a quarter-century, debt was partially repaid for 11 years. The bad habit of deficit spending was broken and the wisdom of balanced budgets was recognized by politicians at all levels of government (even if not all provinces consistently achieved it).

Regrettably, the commonsense approach of spending within one’s means went out the window with the worldwide financial downturn of 2008. The Stephen Harper Conservative government held a minority and opposition calls to turn on the government taps became too loud to ignore. Even Reform Party founder Preston Manning said the $55-billion deficit the Conservatives announced in the 2009 budget was “pretty scary.”

Others weren’t so sure. NDP leader Jack Layton advocated continued deficit spending to usher in a new era of nation-building. Although the Conservatives ran smaller deficits continually until losing power in 2015 (and were on track for balance in their final year), conventional wisdom had shifted.

On Aug. 27, 2015, Liberal leader Justin Trudeau announced a plan for three years of “modest short-term deficits” with a return to balanced budgets in the fourth year. He said with interest rates being so historically low, there was no better time to borrow. Unfortunately, once a balanced budget was no longer the goal, the Liberal-proposed fiscal guardrails were missed and then seemingly abandoned.

The initial target was to restrict deficits to $10 billion, but the Liberals did not meet that target. The fourth year of power came and went. The pandemic came and the federal government opened the floodgates of money. Some went to Canadians, some went to contracts that critics say delivered little or no value, and some went to expansive new social programs. Eventually, the weak target of an ever-falling debt-to-GDP ratio was missed.

Today, there is neither a worldwide recession nor a pandemic nor any other crisis, save for trade uncertainty with the U.S. The historically low interest rates that allegedly made it a good time to borrow are long gone. Yet, the deficits remain when there is no excuse for them.

Canadians still hate the GST, but its rebranding can serve a new redemptive purpose. Let’s name it the DST for Debt Servicing Tax. Every time Canadians buy something and have to pay for it, they can think about how irresponsible it is for a government to spend beyond its means and start demanding they never do so again.

Lee Harding is a research fellow at the Frontier Centre for Public Policy.

Summary: Lee Harding argues Canada’s GST now exists to service soaring federal debt, not fund government priorities. With interest costs set to outstrip revenues, he urges Ottawa to confront chronic deficits and restore lasting fiscal discipline.