May 26th, 2020

Growing debt a danger to Canadian economy


By Lethbridge Herald Opinon on January 13, 2020.

Alex Whalen and Jake Fuss

THE FRASER INSTITUTE

Just before the holidays, the federal government released its fall economic update. It revealed that Canada’s federal debt-to-gross-domestic-product ratio increased in 2019, meaning Canada’s debt has grown faster than the economy.

This is particularly important because the government chose the debt-to-GDP ratio to guide federal fiscal policy. The ratio is the government’s fiscal anchor, meant to impose discipline on its decisions regarding spending, taxes and borrowing.

Upon entering office in 2015, the current Liberal government committed to balancing the budget by 2019-20. It then quickly shifted its primary fiscal goal to shrinking Canada’s debt-to-GDP ratio, a measure that indicates the country’s ability to pay back its debt.

However, according to the December fiscal update, the federal debt-to-GDP ratio increased from 30.8 per cent last year to 31.0 per cent now, and is expected to remain at that level through the end of 2021.

By increasing the ratio this year, the government appears to have broken its own fiscal anchor so it can continue to increase spending, grow the deficit and rack up more debt.

More debt means more interest costs, paid for by taxpayers. And likely higher taxes in the future.

This isn’t a trifle development. Fiscal anchors help guide policy on government spending, taxes and borrowing. For example, the 1990s Liberal government of Jean ChrĊ½tien chose the reduction of nominal debt as its fiscal anchor. That required significantly more fiscal discipline than the current government’s goal of reducing the debt-to-GDP ratio – a goal it’s now failing to achieve.

Moreover, the fiscal update indicates that government spending will continue to grow, even above prior projections. Consequently, the federal deficit is projected to reach $26.6 billion this year, $6.8 billion higher than expected in March 2019. And, of course, chronic deficits are adding to Canada’s federal debt, which is now projected to reach nearly $810 billion by 2024-25.

Looking forward, there are more reasons for concern.

First, the government has firmly established its willingness to ditch the anchor whenever convenient, essentially admitting there’s no particular fiscal discipline or rules governing federal spending, taxes and borrowing.

Without a fiscal anchor, the government lacks a guiding mechanism to demonstrate restraint and is making up the rules on the fly. This is not a recipe for successful management of our government finances.

Second, this time the debt-to-GDP ratio increased while the economy is still growing and unemployment is comparatively low. A weakened economy going forward will spur significant increases in the deficit and debt, and further increases to the ratio.

There’s also reason to believe the government is being exceedingly optimistic in its economic growth projections and doesn’t anticipate a recession in the near future.

But Canada’s major banks are preparing for an economic slowdown and recently set aside more money for loan losses. We’ve also recently seen waning business investment in Canada, rising trade tensions between key trading partners and a softening U.S. economy. Clearly, storm clouds are forming on the horizon.

In a borderline-reckless move, the federal government has violated its fiscal anchor while the economy is growing (albeit slowly). If the economy weakens, as many predict, the debt-to-GDP ratio will increase even more.

The federal government must begin to take fiscal policy – including its fiscal anchor – seriously. Otherwise, the deficit and debt burden, shouldered by Canadians, will continue to grow.

Alex Whalen and Jake Fuss are analysts at the Fraser Institute. Distributed by Troy Media.

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4 Responses to “Growing debt a danger to Canadian economy”

  1. grinandbearit says:

    Funny, “institute analysts” funded by billionaires have consistent right-wing opinions to share with us.

  2. Fescue says:

    I think most people understand the concept of not wasting money, to be thrifty – heck, I’m so thrifty I have undergarments that are older than these young F.I. men.

    But,with their American educations (including one from the American economics department of the U of C), they beat the monotone drum of debt-is-bad.

    By drumming this mantra in the public discourse, they hope that people will support the sort of austerity that only benefits their benefactors – the wealthy 1%.

    Not all debt is bad, however. Much if it is even necessary, being fair to distribute expenses over time – like a mortgage. You can tell what they are saying doesn’t mean much when they adhere to the notion of the ‘fiscal anchor’ (which is a rough policy goal used to simplify the public message) as if it were some impassible barrier. It is only one of a number of goals that governments have, along with public welfare, education, security, infrastructure, and so on. (And I don’t seem to remember the Fraser Institute writing such propaganda when Mr. Debt Creation himself, PM Harper, was at it. In fact, the Conservatives are famous for creating debt or reducing revenues through tax cuts to the rich, as it gives them an excuse to take more away from the undeserving poor.)

    A more objective discussion of our ‘fiscal anchor’ can be found from ScotiaBank analysts:

    https://www.scotiabank.com/content/dam/scotiabank/sub-brands/scotiabank-economics/english/documents/fiscal-pulse/fedeconomicfiscalupdate_2019.pdf

  3. zulu1 says:

    When has this Trudeau government ever shown any fiscal responsibility. They claimed that deficits would be held to $10 billion dollars annually then proceeded rapidly to $20 billion plus and no plan to ever balance the books even with unemployment at modest levels nationally. They do what they are best at, spending money on everything they possibly can . Nothing new here !,

    • Fescue says:

      You said it, zulu1. And remember when Harper turned around a surplus to a $55.6 billion deficit in a single year – followed by five more deficits. Oh, those were the days, especially when we got nothing for it.