The Government of Canada’s Current Fiscal Deficit Doesn’t Matter

By: Noah Clarke

In Canada, the economic impact of the pandemic quickly made itself known. In March and April alone, more than three million Canadians lost their jobs as travel and non-essential services were shut down to limit the spread of the virus. The unemployment rate quickly soared to 13 per cent.

Now, those that remain working work fewer hours on average. The most vulnerable workers are disproportionately affected by COVID-19 restrictions, as job loss was more rapid in positions with less security, poorer pay, and for industries that could not transition to online work. The Canadian economy, according to Statistics Canada, contracted at an annualized rate of 38.7% for the quarter ending in April.

These extraordinary circumstances caused the Government of Canada to introduce new temporary programs to stabilize the Canadian economy. To jump-start the post-pandemic economy the federal government is preparing to spend up to an additional $100 billion over the next three years despite an already record-high deficit projection of more than $381 billion for this fiscal year (2020-2021).

The deficit has become an increasing source of stress for many Canadians. A recent survey of 1,039 Canadians by Nanos Research found that 77% of respondents were in some way concerned about the deficit. Worry is widespread across the country, with the West, Atlantic Canada, Quebec, Ontario and British Columbia all expressing high levels of concern. However, more recent survey data from the Environics Institute suggests that Canadians’ concern about the deficit is taking second place to concern about whether the government is doing enough to respond to the virus.  This in mind, it is pertinent to consider the implications of heightened government spending.

            There is no need to worry about the federal government’s temporarily increased spending because of historically low interest rates and the federal government’s strong fiscal position. The federal government’s temporarily increased spending is meant to help resolve the COVID-19 crisis and stabilize the Canadian economy.

            Canada is one of the best positioned countries to be temporarily increasing spending to stabilize the economy in face of COVID-19. When the pandemic hit, Canada had the lowest net debt-to-GDP (gross domestic product) ratio among Group of Seven (G7) countries, including the United States, the UK, and Japan. The federal government’s temporarily increased COVID-19 spending levels are causing the federal debt-to-GDP ratio to rise to 49% for this fiscal year. Despite this, Canada is still on track maintain its lower debt levels than other G7 countries. Overall, this means that Canada was in a good position before the pandemic and remains in a good position despite temporarily increasing spending to stabilize its economy.

In addition, in response to the economic impacts of COVID-19, the Bank of Canada lowered interest rates to 0.25% to support economic activity. This means the cost of borrowing money is lower for the federal government and that is why this is the best time for the government to be locking in low interest rates by borrowing at longer maturities (issuing longer term bonds). In fact, this historic decrease in interest rates is prompting the government to now issue an unprecedented number of long-term bonds. As a result, debt servicing costs are projected to decline by $4 billion this year. Essentially, the Government of Canada is taking advantage of low interest rates to ensure that its debt remains affordable and sustainable.

Another way to measure the sustainability of the federal government’s finances is by understanding the government’s ability to cover its debt payments. Currently, the federal government’s debt service costs account for about 7% of federal revenues, which is much lower than the peak of 38% back in 1990-1991. The Government of Canada’s interest-payment-to-GDP ratio also remains below the peak levels from the 1980s-1990s. Ultimately, this means that the Government of Canada remains more financially healthy than it did in the past debt crisis in the 1980s-1990s and is able to cover its debt payments.

It’s important to note that this level of spending is not sustainable in the long-term. If the Government of Canada continued its currently increased level of spending over the long-term then there would be something to be concerned about. However,  this is why the federal government has highlighted that these increases in spending are temporary measures to stabilize the Canadian economy in the face of COVID-19, not permanent changes. Certainly, the Government of Canada’s debt will still be there after COVID-19 and will certainly need to be dealt with but right now the priority is solving the COVID-19 crisis and stabilizing the economy.

Still, in the end, the deficit is not something to be concerned about in the short-term. Canada’s strong fiscal position and currently low interest rates are allowing the federal government to focus on resolving the COVID-19 crisis and stabilizing the economy in the short-term.  

Noah Clarke is currently in his first year of the Master of Public Policy program at the Munk School of Global Affairs and Public Policy. He graduated from the University of Western Ontario with a degree of Bachelor of Arts with Honours Specialization in Political Science. Some of his interests include politics, sustainable development, economic development, environmental policy, energy policy, technology innovation and housing affordability. 

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