Fresh Takes

Canada’s deficits increasingly worrisome

This past April, the International Monetary Fund (IMF) predicted a “massive” increase in government borrowing around the world in response to the COVID-19 pandemic.[1] Needless to say, they were right!

Over the past nine months, the government of Canada increased its borrowing by an enormous amount in order to ramp up public spending related to the pandemic. Among other things, it came to the aid of Canadians dealing with the extraordinary circumstances of COVID-19. Statistics Canada estimates that the federal government will borrow $713 billion in 2020-2021, which is 60% more than it borrowed last year.[2] Moreover, the IMF has determined that Canada’s level of borrowing is approaching the equivalent of 20% of the country’s GDP, which is among the highest in the world, as can be seen in the figure below.

Of course, during a health emergency, budgetary tools play a necessary role in the management of the crisis and give the government the flexibility to react quickly based on the severity of the situation. However, even before the pandemic, the federal debt was already at a level that deserved to be watched closely, the equivalent of 31% of GDP in 2019,[3] and this ratio is projected to reach 49% by the end of 2021.[4] Instead of doing what needed to be done to get public spending under control, the federal government piled up substantial deficits in the preceding years, during a period of economic prosperity.

If our government continues to accumulate debt at this rate, servicing that debt will end up being a real burden, negatively affecting the government’s ability to deal with future crises—not to mention that our credit rating could suffer. Creating an environment that favours growth and a stronger safety net for the next generation will require a more responsible management of the budget.

Source: John Letzing, “Countries are piling on record amounts of debt amid COVID-19. Here’s what that means,” World Economic Forum, November 5, 2020.

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1. Chris Giles, “Governments face ‘massive’ rise in public debt, IMF warns,” Financial Times, April 15, 2020.
2. Author’s calculations. Government of Canada, Economic and Fiscal Snapshot 2020, August 24, 2020, p. 158.
3. Government of Canada, “Annual Financial Report of the Government of Canada Fiscal Year 2018–2019,” November 20, 2019.
4. Idem.

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