As we look to exit the turbulence of the pandemic, a new report from the C.D. Howe Institute examines just how fragile Canada’s fiscal prospects really are.
By testing Canada’s future simulated debt burden under alternative scenarios, Alexandre Laurin and Don Drummond find that we could very easily be in a world of trouble.
Only small changes in assumptions of economic growth and interest rates are capable of significantly altering the course of the projected debt burden.
For instance, they find that their baseline scenario shows an upward long-run spiking of the federal debt ratio, seeing it rise from 51 percent of GDP in 2021 to 60 percent by 2055. Additionally, the combined federal and provincial net debt ratio could possibly reach over 140 percent by 2055.
It is irresponsible to only focus on rosy scenarios moving forward, as the federal government has done, they write.
“We believe the federal budget’s long-term growth assumptions to be optimistic. Given the amount of uncertainty over prospects, budget assumptions certainly cannot be ruled out. But in leaning toward the optimistic, they do not provide a solid base for planning; plans based upon overly optimistic assumptions put the country at risk. Less optimistic alternatives should be considered in deliberating upon policy.”
Finance Canada’s favourable scenario shows the debt-to-GDP ratio declining to the pre-pandemic level of 30 percent by 2055, but these projections are based on higher average GDP growth and lower debt-servicing costs than the authors’ baseline assumptions.
Finance Canada’s projections also do not account for future unfunded spending commitments, nor do they acknowledge that provincial government debt has spiked during the pandemic and could continue to rise.
The most important thing this exercise reveals, the authors conclude, is that fiscal decisions today must be geared towards increasing Canada’s sustainable productive capacity and long-term economic growth rate.
