The Canadian federal debt left behind by the Liberals’ pandemic spending has concerned many residents.
The ongoing debt will in three years amount to $1.2 trillion — twice what it was before spending to prevent a deep, deep pandemic-induced depression.
To put the matter in perspective, the $343 billion deficit this year alone is more than twice the $331 billion budget last year.
The government had little choice other than trying to flood the nation with cash to struggling wage earners, faltering businesses, and others.
In the Great Depression of the 1930s, government reaction was the opposite of pumping cash into the system. Governments then increased unemployment by cutting expenditures and pulled cash from the system by increasing taxes.
Banks and lenders brutally foreclosed on borrowers in arrears, pushing down prices of land and business, causing more unemployment.
The response by the Canadian government and others around the globe this year was the right thing to do. It may not have pleased a few right wing libertarians who believe in the survival of the fittest and who would have preferred the response of governments from the 1930s when the few rich at the top of the wealth chain accumulated even more.
So what happens with the gargantuan pile of debt the country has rolled out?
To most of us, excessive debt spells financial misery and possibly bankruptcy. The question becomes: How do we repay that debt?
Applying the experience of individuals to national debt is inappropriate. National governments simply do not repay debt except for token payments like the Liberals in the 1990s and the Conservatives in the early Harper years.
Not repaying relieves some of the burden on taxpayers and future generations.
National governments wait for the economy to grow and reduce the debt as a percentage of national production. Canada’s national debt will soon equal 50 per cent of national production — up from about one-third.
The risks faced by this debt vary. What happens if a second pandemic lockdown occurs? Can we afford more bailouts? If not, will the debt accumulated from the first one have been for nothing?
If another lockdown is avoided, the concern becomes interest rates paid on debt. Interest on the new debt will actually be $4 billion less than last year because interest rates have dropped to near zero.
As long as these rates stay, government and the taxpayers are safe from exploding interest costs.
An accidental unusual event, such as loss of confidence among global banks as happened in the 2008 recession, could escalate interest rates.
No country around the globe wants higher interest rates. All have increased national debt levels to bail out the pandemic economy and can’t afford higher interest rates.
To avoid the short-term impact of potential higher interest rates the federal government is issuing almost one-third of the new debt in 10-year to 30-year bonds, pushing the matter out far, rather than risking changes on short term bonds.
One-fifth of pre-existing debt comes up for roll-over at lower rates in the next few years.
These policies leave Canada with less intense pressure from the mounting debt.
Once Canada is sure the pandemic is resolved policy measures can tackle reduction of the annual deficit.
Demands for an immediate policy to deal with the debt are like wanting a plan to rebuild a house while the destructive tornado approaches.
Ron Walter can be reached at [email protected]
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
