Don’t fret about government debt after COVID-19

Long-term borrowing costs low, Alex Hemingway writes.

There is continuing discussion about whether rising government debt from the COVID-19 crisis poses a big problem for Canada. In fact, it’s just the opposite.

Large-scale public spending to support people and invest in the long-term public good is prudent not only on a human level, but also for our long-term economic prosperity. And while the size of government debt compared to our economy (our debt-to-gdp ratio) will rise substantially through this crisis, that’s not something we should be concerned about.

Consider a few of the reasons why we shouldn’t fear the debt.

First, long-term borrowing costs for government are extremely low. As a result, making public investments with even modest social and economic payoffs will leave us wealthier as a society (more than covering borrowing costs) compared to what it will be if we don’t make those investments.

Indeed, we have an enormous backlog of highly productive public investments that are badly needed in this country, including in climate action, housing, child care, public transit and the tackling of poverty. We should invest in these public goods aggressively in the coming months and years, both because they’re important in themselves and also to help strengthen our economy.

Second, governments have very long time horizons over which to manage debts, unlike households. If people are going to make ends meet during the pandemic and in the economic aftermath, the only alternative to incurring public debt is piling more private debt on already over-leveraged households.

Our permanent institutions of government are much better positioned to bear debt than households, which can depend on income only over a finite number of working years. We know from the experience of the Second World War (when Canada’s debt-to- GDP rose above 100 per cent) that we can emerge from a crisis and successfully manage high levels of government debt gradually while the economy grows.

Growth rates may not reach postwar heights, but investing in urgently needed physical and social infrastructure will improve our longterm productivity and growth prospects, in addition to providing shorter-term economic stimulus and meeting pressing human needs.

We live in an incredibly wealthy country today, but also an incredibly unequal one. That extreme inequality is a result of public policy choices and we can make different ones.

To help pay for public investments and to service debts, we also have the option of getting serious about taxing the super-rich. A few of the many policy tools available to us are a wealth tax, a wartime-style excess profits tax and long overdue measures to crack down on tax havens.

While millions of Canadians and businesses are struggling right now, a subset of corporations, including some in big tech, are making windfall profits amid the crisis. And, it’s never been clearer that no corporation or individual accrues profits or wealth on their own, but only with the help of workers and the public investments that make our society and economy tick.

Finally, much of the public debt we are adding today, we actually owe to ourselves. That’s because one of the biggest purchasers of government debt right now is the Bank of Canada itself. This is especially true of federal government debt, but increasingly includes provincial debt. When we are our own creditors, it opens up possibilities to be flexible on repayment terms and timelines and the choice can always be made to roll over this debt at maturity.

After decades of being told “the cupboard is bare” when it comes to public spending, we’ve now seen a dramatic glimpse of the resources we can marshal when necessary. But expect to soon see efforts to try to stoke fear about public debt and push for cutbacks and “belt-tightening.”

Don’t be fooled. The real danger to our longterm prosperity would be to forgo important investments and fail to take care of each other in the months and years ahead.

Laying the groundwork for lasting economic well-being demands that we use our shared institutions to tackle the urgent social and environmental challenges we face. We are rich enough not only to weather this crisis, but also to strengthen our public services and build a fairer and more equal Canada for the longterm.