Why Canada’s debt won’t keep economists up at night
Some predict that we will enter a post-WWII like boom
Just as it did during the Second World War, Canada had no choice but to bring out the big spending guns to combat a COVID-19 pandemic that’s still raging around the globe, many economists say.
And, just as it did after the Second World War, the country could come out of this massively expensive conflict with a better economy than it had going in.
“It sort of reminds me of 1939,” says University of Toronto economist Peter Dungan.
“War with Germany breaks out (and worried about the economy) somebody says, ‘Oh my God, we’re going to accumulate this huge amount of debt (and their solution is) let’s just surrender,’ ” he says of the absurd idea.
“If you worry about hobbling debt, then that’s what you do,” he says. You don’t provide the Canada Emergency Response Benefit (CERB) and the other things and you just let people suffer, Dungan said.
Jennifer Robson, a political management expert at Ottawa’s Carleton University, dismisses any suggestion that the massive COVID-19 debt could have been avoided.
“I just want to be clear. The proposal is that we should not have given people income support, we should not have provided wage subsidies, we should not have done transfers to provinces for safe restart agreements, we should not have purchased vaccines?” Robson asks incredulously. “That’s the counter argument?”
Mark Kamstra, an economist with
York University’s Schulich School of Business, agrees the debt was unavoidable.
“We always have choices,” Kamstra says. “We just chose not to allow hundreds of thousands of people to die or suffer … and I think we made the right one,” he says.
Still, there are fears among Canadians that the nation’s gross debt, forecast to balloon from $1.249 trillion in 2020 to more than $1.572 trillion this year, will hobble our economy for future generations.
Dungan is among the many top economists who do not share these fears. To explain, he returns to the Second World War analogy.
“Did the debt, which was even bigger as a proportion of the economy at the end of World War II, hobble our economy as we went into the late ’40s and 1950s?” he asks.
“It sure doesn’t look like a hobble to me.”
Quite the opposite. The postwar period produced boom times for the country’s economy that lasted into the 1970s, despite the alarming arrears the conflict created.
And this scenario can play out in post-pandemic Canada for a variety of reasons.
Blessed with historically low interest rates, which show little sign of rising, and one of the healthiest debt-to-GDP ratios in the developed world, Canada cannot only service its pandemic bill, but thrive on the other side, many experts say.
Unlike an average household, where interest on credit cards or student loans can be crippling, the COVID debt that Canadian governments have incurred is exceptionally cheap and will be for some years to come, says Dungan, an economic analyst and policy expert at U of T’s Rotman School of Management.
“So the idea that there’s a huge interest burden is largely not a problem here in terms of hobbling you going into the future,” he says.
Indeed, with past debts — which were borrowed at higher interest rates, being rolled over into lower rate loans as they come due — interest on the debt is likely to fall even further, Dungan says.
“So the net interest that the government is paying on its debt...is actually not just likely to stay low, it’s actually likely to go lower in the next few years,” he says.
And Canada’s low debt-to-GDP ratio, which sits at 89.7 per cent, will likely shield the country from interest rate hikes that more profligate countries could face. (By comparison, the U.S. ratio is 107 per cent, while Japan’s is 237 per cent.)
“If the guys in the suspenders, the bond traders, want to pick on somebody, they’ve got people other than us to pick on,” Dungan says.
“It’s unlikely that the world financial markets are going to clobber us with a high interest rate anytime soon.”
As well, unlike household debt, which is paid to entities outside of the household, like banks and car companies, Canada’s debt largely stays at home, Dungan says.
“In a household, you have to pay (debt) to other people, so you can earn money, but you can’t enjoy it,” Dungan says.
“But most of the new debt that Canada has incurred has been to Canadians. In Canada, we have borrowed from ourselves.”
Thus, Canada’s pandemic debt, on spending that will reach an estimated $322 billion by the end of March, will remain largely in-house. And the domestic bond holders who own it — pension funds and banks, flush with the unprece- dented pandemic savings of housebound Canadians — largely spread the money, however equitably, within the country’s borders.
“It’s not a hobbling debt in the sense that … you’ve got to scrape together the income to send it out of your household and it’s gone,” Dungan says.
“If (Canada’s government indebtedness) puts you in mind of a household that’s struggling with its debt, that’s fair enough,” he says. “But that’s just not the case for Canada here, it’s just not.”
And while the debt is manageable and won’t rise soon, the massive COVID spending that goosed it will give the post-pandemic economy a decided head start, experts say.
Had federal and provincial governments not borrowed money for generous aid programs, had many more companies been bankrupt and private capital markets left in chaos, then the post-pandemic economy would have started out in tatters, many economists say.
Or, if we came out of the recession with what are called “scarred workers,” workers who lost their skills or who have just become demoralized about their place in the economy, then we would have been starting from a much lower position, Dungan says.
“You would have had fewer debts to worry about,” he says, but the country would have seen a much lower GDP per person, which means everyone would be a little poorer.
Kamstra agrees that low interest rates and a good debt-to-GDP ratio will keep the COVID debt manageable — as uncomfortably high as it seems.
“We’ve seen these kinds of debt levels before and in a low interest rate environment, (they) aren’t very hard to service and (we can) slowly get out from under,” he says.
“As long as no country breaks ranks and starts raising interest rates, we’ll have a prolonged period of low interest rates and slow servicing of that debt.”
But Kamstra says the national debt could be paid down by raising taxes on those who have been working. .
“This, basically, was equivalent to a very bad vacation for a lot of people,” he says. “People who would normally be providing services, massage therapists, all kinds of in-your-face people, just couldn’t really work.”
While various government programs have supported these workers, “most of the money that would have been spent on them, that they would have earned, has been sitting in bank accounts of people like me,” Kamstra says.
“The government probably needs to say … we’re going to raise your taxes for the next year or two and we’re going to cover the debts we took on to support these people.”
The alternative, Kamstra says, would be to cut services and dilute pandemic supports for lingering COVID -19 contingencies.
“They could pay off the debt that way, which would kill a lot of dreams and hopes,” he says. The little extras we enjoy are always the first to be cut.
Fellow Schulich economist Burkard Eberlein suggests there’s little need for any extraordinary measures to tackle the pandemic deficit.
“The conditions for running deficits couldn’t be better,” Eberlein says, pointing out that effective interest rates for
governments in Canada are now below one per cent and that inflation remains negligible.
“So (the Bank of Canada) can essentially print a lot of money,” he says.
“It doesn’t mean you don’t have to pay it back, but it’s not going to (build up) to the same extent that it otherwise would … and there’s no sign that this will change soon.”
Eberlein also points out that some COVID spending has been targeted at initiatives — outside of immediate support payments — that will help the country’s economy and safety in a post-pandemic world.
“We are spending money on lots of things that could be productive or valuable,” he says. “For example, with the pandemic, all (kinds of) gaps have been exposed in health and pandemic preparedness and in other areas.”
And the debt-backed spending that is addressing such shortfalls, especially in health initiatives, would almost certainly not have happened without COVID, Eberlein says.
“And I think that’s beneficial. For one, these were gaps anyway,” he says. “Secondly, I think a lot of people now say, ‘Maybe this pandemic will be behind us, maybe by the end of the year, but it’s not going to be the last.’ ”
Eberlein says the lessons left unlearned from SARS have definitely sunk in with COVID, and adds that some debt-fuelled spending will strengthen our response to the next crisis.
“We’ve learned (for example) that it’s really important to have your own domestic manufacturing capacity for vaccines, for (PPE) supplies and we’re going to see investments in that,” he says.
“So that’s another good argument for spending; you spend it in those areas of preparedness, of critical infrastructure that are not in the shape they need to be, (or) that were cruelly exposed like in long-term care.”
Debt-funded capital projects in green infrastructure that the federal Liberals are championing will also help the economy climb more spryly out of a COVID recession, Eberlein says.
“It’s kind of tragic that we needed this to get going on some of those files,” he says. “The pandemic was certainly an accelerator of many of those things.”
Robson agrees the cost of debt servicing will remain historically low in the immediate term.
But, she says, unlike previous economic downturns, the COVID crisis has been fuelled by expenditures that will soon disappear.
“We’re not talking about new structural programs that the government is committed to in perpetuity,” Robson says. “That was the situation heading into the 1990s (for example). Much of that debt was not these temporary measures. A lot of it was structural. It was stuff that the government was committed to doing year after year after year (such as funding for education or health care).”
Thus the painful federal layoffs, transfer cuts and program and service reductions that occurred in the 1990s might not be necessary now.
Indeed, one of the largest COVID programs, the CERB initiative, has already folded its tent, and the employment insurance (EI) payments that have replaced it, while expensive, will gradually become cheaper as the country gets back to work, Robson says.
“These are all things that have an end date,” she says.
Ryerson University economist Vik Singh, however, sees the debt that has “mushroomed to gigantic proportions” as somewhat more dire than many of his colleagues.
“Obviously, the debt situation right now is pretty alarming,” says Singh, an expert in international finance at Ryerson’s Ted Rogers School of Management.
“The government has already announced that there’s going to be a massive deficit going in (and) the debt level is going to exceed the GDP by 2030,” he says.
Singh also says the low interest rates that help make the debt manageable now could well go up in the long term.
At the same time, however, he says there’s little doubt that the country’s economy will bounce back to some extent in postpandemic times and that the increased revenues produced by that rebound will help lessen the debt’s impact.
“So the likelihood of this (COVID debt) being a major factor going into the next generation, I don’t see it being a huge implication,” Singh says.
Singh says lessons learned during COVID could blunt any debts incurred in future crises, by better targeting relief funds, for example.
“But nobody really knew how the pandemic was going to shape out (this time) so the government had to take action,” he says. “I doubt it could have been done any cheaper because we didn’t have a precedent. They had to react.”
In the end, Dungan says the debt-fretting hand wringers are likely heating their palms in vain.
“If interest rates rose suddenly, if you had too big a deficit for too long over the next few years … you could get into territory that starts to get tricky,” he says.
“But so far, so good, and with lots of room to spare, as far as I’m concerned.”