Growing debt a danger to Canadian economy

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 ChrŽtien 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.

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