Many anxious Canadians are asking themselves: how much is Canada’s Corona debt, and how are we going to pay for it?
In this article, canadNow will give you the hard numbers of Corona spending, how this affects our deficit, historical contexts, and some possible options for paying it off.
The Current Deficit
As of right now, various estimates place the Canadian federal deficit at $250 billion. To put that in perspective, last year’s deficit was 1.1% of GDP; our current deficit for the 2020-21 fiscal year stands to be 12.7%.
If drastic fiscal measures continue, economic recovery is slower than expected, or the Corona emergency persists, the deficit could rise as high as $400 billion.
At face value, these are daunting numbers. How else does a citizen react to a 1200% increase in the federal deficit, before accounting for any possible future expenditures?
A key question is how these numbers fare in a historical context. Are they exceptional or reasonable, given the circumstances?
Readers may be relived to hear that as far as debt-to-GDP ratio is concerned, current levels are similar to 2000, and lower than peaks recorded in the mid 90’s (66%).
So, although the absolute cost is a rapid escalation year-over-year, when put in relation to our nation’s GDP, the increase isn’t nearly as drastic, and in line with historical margins.
Our financials are something to be concerned about, but the numbers are reasonable considering what our country and the world are going through.
But how will Canada pay for it?
Re-Paying Corona Debt
This question is still up in the air, since the prime minister has recently avoided questions about how Canada’s Corona debt will be paid for. Therefore, this next section is complete speculation.
Conventional logic would assume the only way to handle a massive debt would be to run government surpluses in the future, using the extra money to pay down the principal, on top of the mandatory interest payments. The only way this could be accomplished, in the absence of any major growth in GDP and government revenue, would be through spending cuts, increased taxes, or some combination of both.
Another way, discussed in depth in a recent article, would be not actually paying it down–just rolling it into government debt going forward, holding onto it year over year. This may sound counter intuitive, but we will paraphrase the central ideas and address their short-comings.
After WW2, federal debt was 100% of GDP. In the 30 years after, there were no significant government surpluses, and raw debt actually increased.
How does this make sense?
Over time, the debt became a smaller portion of total GDP, because of economic growth and inflation.
Unlike us citizens, governments are privileged to work under the assumption they will persist longer than the typical time periods a person is required to pay debts. Therefore, there is no necessary rush to pay down debt if the government chooses not to.
If, over time, economic growth persists, the outstanding debt becomes less in relation to GDP, and the value of it decreases due to inflation, making it easier to pay off.
Although this idealistic notion certainly looks attractive–who wouldn’t take on debt if there wasn’t a timeline to pay down–it makes generous assumptions.
It assumes the economy will grow, and our debt will remain relatively stable. The assumption of economic growth is a hazardous one: the world economy was already slowing before the pandemic, and recovery is likely to take time. And this isn’t factoring the possibility of negative interest rates spreading around the world.
The concerns about Canada’s economic recovery are threatened further by the fact the two biggest drivers of recent economic growth, housing and energy, are already taking a big hit and that this will continue, at least in the short term.
The theory also skirts the issue of further spending if Corona takes longer to resolve and requires extra fiscal stimulus, adding even more to our debt.
And there’s this question: will letting the debt “sit there” be ok with Canadians? Any persistent debt load, or year-over-year deficits, will hurt our credit rating and lead to more taxpayer dollars going to interest payments.
Also, future fiscal and monetary moves may be restricted if Canada has a substantial outstanding debt, which will hamper our ability to handle future shocks.
Whichever route the government takes, the conversation is certain to be a heated one.
It is important to remember Canada was in a very strong financial position before the pandemic, leading the G7 in debt to GDP ratio. That, along with historically low borrowing costs, makes the fiscal measures Canada has undertaken appear much less daunting.
One of the main questions is economic recovery, and how long it takes before Canada lifts the unprecedented spending keeping the country afloat.
On the other side, there’s concern if Canada’s Corona spending is pulled back too quickly it will have knock-on effects, stifling our economic recovery in the short term.
The current debt and deficit numbers are certainly easy to spin depending on what you want to see: you can point to the raw debt and raise warning flags about impending financial hardship, or you can look at the debt-to-GDP ratio in a historical context and realize our current situation is not completely outside the norm.
Either way, Canadians will be paying close attention to how the government addresses these issues, and the impacts this will have on our economic recovery and future financial well-being.