Fiscal insanity

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   By Guest Blogger Ryan Lewenza

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Question: How many of you live far beyond your means, consistently spending more than you earn, piling up thousands of dollars in debt, with little or no regard for the long-term consequences of that behavior?

Hopefully, nobody. Common sense tells us this kind of lifestyle is neither responsible nor sustainable over the long run.

Yet it’s exactly how the governments of the U.S., Canada, and many other countries operate today. They keep spending far more than they bring in, focusing on the short term and kicking the financial consequences down the road.

At what point do politicians and policymakers confront the simple reality that you cannot perpetually spend more than you earn? When will they acknowledge that runaway deficits and soaring debt levels don’t just disappear – but instead compound, eventually demanding a painful reckoning?

Today, I’m going to provide an update on the out-of-control government spending and ballooning deficits across North America. It isn’t going to be pretty – so you might want to grab the Pepto-Bismol, maybe a warm blanket for comfort, and let’s get started.

A government collects revenue through taxes (income, corporate, fuel, etc.) and spends money to operate and provide services such as healthcare, education, and firefighters. When tax revenues exceed spending, it runs a surplus; when spending exceeds revenues, it runs a deficit.

The U.S. has not run a surplus since the early 2000s under President Clinton. The good old days. Since then, it has recorded deficit after deficit. Last year alone, the deficit reached US$1.7 trillion – which equates to 5% of GDP. While this is down from the COVID-era peak near 15% of GDP, it remains historically high, especially given that the U.S. economy has been pretty strong.

U.S. deficits push US government debt to $37 trillion

Source: Bloomberg, Turner Investments

There are only two realistic ways to eliminate persistent deficits: raise taxes or cut spending. Some argue that inflation – effectively printing money – can solve the problem, but that approach carries serious long-term consequences. In reality, a return to fiscal sanity and a balanced budget requires some mix of higher taxes and lower spending.

Raising taxes is politically toxic, particularly for Republicans. President Trump recently past one of the largest tax cuts in U.S. history, making higher taxes a non-starter for now. That leaves spending cuts – but where would they come from?

The largest portion of the federal budget is mandatory spending, mainly Social Security, Medicare and Medicaid. Few Americans – particularly seniors who depend on their monthly security cheques – are willing to see these benefits reduced. Mandatory programs account for roughly 55-60% of total spending.

Next is discretionary spending, including defense, education, housing, and transportation. Total federal spending last year was about US$7 trillion, with defense accounting for roughly $900 billion (13%). The U.S. already spends more on defense than the next ten countries combined, yet President Trump has proposed increasing defense spending to $1.5 trillion – a 50% increase, which would push defense to over 20% of total spending. The obvious question is: where does the money come from?

Finally, there are interest payments on the national debt, now approaching $1 trillion annually. These payments are unavoidable – failure to pay would mean default and economic calamity.
When you break down the numbers, it becomes clear that spending cuts alone cannot close a $1.7 trillion annual deficit. Claims that the U.S. can “cut its way” to a balanced budget are mathematically implausible. Any serious attempt to fix America’s fiscal position will require both spending restraint and higher taxes.

The real question is when will U.S. policymakers confront this reality and address what is becoming a fiscal time bomb. Just this week, Jamie Dimon, CEO of JPMorgan, warned that rising debt levels could eventually trigger “some kind of bond crisis” if action isn’t taken.
Turing closer to home, this week, the federal Liberal government released its spring economic update, and much like the U.S., government spending continues to rise, deficits persist, and there is still no clear plan to return to the balanced-budget days of the past.

Spending is set to increase with $37.5 billion in new commitments, including $5.9 billion for worker retraining and recruitment. Canada faces a significant shortage of skilled workers, a problem that will only worsen given the government’s ambitious infrastructure plans. These programs aim to create 80,000-100,000 new skilled workers by 2030.

Personally, I like this initiative a lot. I recently wrote a blog on the importance of skilled trades in Canada, and this program directly addresses that challenge. There is also additional defence spending, which is long overdue in my view and moves Canada closer to its NATO commitment of 2% of GDP.

That said, this new spending means continued deficits, with red ink projected well beyond 2030. The government will point out that this year’s deficit is lower than forecast in the fall update – but don’t be fooled. Spending continues to rise.

In the Fall 2025 update, the deficit was estimated at $78 billion. This spring update projects a $67 billion deficit, an improvement of $11 billion, but still an uncomfortably large number. By 2030, the deficit is projected to fall to $53 billion.

Canada federal deficits projections till 2030

Source: Canada Strong for All; Spring Economic Update

As a result, interest costs on the federal debt will continue to rise. This is the core problem with persistent deficits: as debt grows, so do debt-servicing costs. More tax dollars go toward interest payments and fewer toward public services – and potentially leading to higher taxes in the future.

So, while I’m not thrilled to see higher spending and ongoing deficits, at least a meaningful portion of this new spending is being directed toward investments – such as retraining workers and building infrastructure like pipelines and high-speed rail – which could deliver both short and long-term economic benefits.

It’s important to note that Canada’s federal debt level remains relatively low, particularly when compared with its G7 peers. As shown below, Canada’s debt-to-GDP ratio is approximately 60%, versus roughly 110% in the U.S., 135% in Italy, and an eye-watering 236% in Japan.

Previous governments – the Liberal Chrétien/Martin era followed by the Conservative Harper government – did a commendable job managing the economy and generally maintaining balanced budgets. This period of fiscal discipline put Canada in a strong position and gave the incoming Trudeau government the capacity to increase spending and rely more heavily on debt to fund new programs. Over Mr. Trudeau’s tenure, federal debt doubled from roughly $600 billion to $1.2 trillion, and with Prime Minister Carney’s current spending plans, it appears set to rise even further.

The burden of these decisions will be felt most acutely by younger generations. Today’s deficits are being run largely by baby boomers, while our children and grandchildren will ultimately be responsible for paying the debt back – through higher taxes, reduced services, or both.

So, for younger readers: are you comfortable with this surge in spending on social programs and the mounting debt that accompanies it? Or, like me, are you concerned about the long-term consequences of this fiscal path and the inevitable reckoning you’ll be forced to confront?

Canada’s debt to GDP ratio

Source: Macrotrends

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

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Source: https://www.greaterfool.ca/2026/05/02/fiscal-insanity/