Canada’s frog heats up

Is Canada at risk of boiled frog syndrome? Many of us have heard the theory that if a frog is dropped into a pot of boiling water, it will immediately jump out, but if it’s put in cold water that’s heated gradually to a boil, it will die before it escapes. For Canadians, the hot water isn’t in a pot, it’s in our rising public indebtedness, which politicians deliberately downplay.

The level of public indebtedness in Canada is often misrepresented by pointing to the debt-to-GDP ratio of just one level of government. Politicians and commentators, including economists, often say the federal debtto-GDP ratio of just over 30 per cent means Canada has plenty of fiscal capacity to borrow and stimulate the economy. But there’s a more realistic view of public indebtedness, one that combines both federal and provincial/territorial debt. The Canadian Federation of Independent Business calculates that the total public debt in Canada rises by roughly 86 per cent when provincial and territorial debt is added to federal debt.

The most comprehensive measure of Canada’s public indebtedness is the OECD data on general government debt. These data show that Canada’s debt-to-GDP ratio based on all public indebtedness in 2014 was 107.2 per cent. This is not far behind Spain (118.9 per cent) and Ireland (122.9 per cent). These are countries that only recently needed emergency international support during the eurozone crisis and would probably still be financial basket cases today if it hadn’t been for the European Central Bank propping them up.

Canada’s total indebtedness had been increasing only by small amounts from 2009, when the total debtGDP-ratio was 102.1 per cent, to 2014. However, it is reasonable to expect that it will grow at a much faster rate given that the new federal government has embraced deficits as beneficial, while provincial governments in Ontario and Alberta have abandoned fiscal prudence.

We may not have noticed, but the temperature is starting to rise all around us. The Department of Finance recently released an update of long-term economic and fiscal projections that emphasized the consequences from an aging population. It projected the decline in labour participation placing downward pressure on productivity and economic growth, while public spending only rises for age-related programs such as elderly benefits.

It is ironic that a prime minister who espouses progressive values is putting in jeopardy the very future of Canada’s social programs by running endless deficits in the name of fiscal stimulus. Unlike a frog, a country’s troubles don’t end once its cooked. As debt crises in Argentina and Greece have shown, what follows reckless spending is the reduction of public services and the scaling back of public pensions. Then there comes inflation, which not only makes pensioners even poorer, it erodes everyone’s wealth and purchasing power. That leads to depressed demand for goods and services, which drives up unemployment, even as the government finds it increasingly difficult to maintain unemployment support.

Canadians aren’t frogs, either. Taxpayers might sense the danger before it’s too late. There are opposition politicians, in Alberta, in Ottawa, and elsewhere, who already sense it and want to make it stop. Governments with an agenda of curbing spending and eliminating deficits have been elected before. And over the next few years, Canadians might get a very real sense of where we’re headed as other countries, including several in Europe, are already in deeper and hotter water than we are, and are very close to arriving at a serious reckoning. If we’re paying attention, we’ll recognize the warning signs of what awaits us if we don’t change course and keep ourselves out of hot water.