Canada must work to bridge two debt gaps, says former BoC governor

Report identifies need for new fiscal anchor, as well as alternative to traditionally used debt-GDP measure

Canada must work to bridge two debt gaps, says former BoC governor

The COVID-19 pandemic has ripped open the Canadian economy, leaving massive wounds after it hit hard in the first quarter and left lingering effects and afershocks. Among those is a surge in debt, which according to one economist comes in the form of two deficits.

In a report for the Public Policy Forum’s Rebuild Canada program, former Bank of Canada Governor David Dodge said both the country’s governments and its private sector, including households and businesses, are set to service much more debt in 2022 compared to 2019. That means two deficits, public debt and the current account deficit, will need special attention.

Because of COVID-19, some estimates project federal government debt to swell possibly by $500 billion this year. That sets the stage for more interest payments from Canada to the rest of the world, as well as further pressure on the current account deficit.

Dodge said that the current account deficit has run about $60 billion a year, reflecting an unfortunate bias for households, businesses, and governments toward borrowing to support consumption rather than investments in productivity increases to foster future income growth. Canadian business has also come to invest more out of the country than domestically, the report said, opening up an $800-billion gap over the past decade.

Further darkening the picture is the all-but-certain prospect of lower revenues from the oil sector, which remains a foundational pillar for the Canadian economy. According to the report, the energy industry has produced a positive net return of $76 billion yearly, with 90% coming from oil and gas.

And while the fiscal deficit is not exactly at the point of running wild, the report maintains a need for it to be brought under control, which includes decreasing it by increments to 1% of federal revenue. Dodge said that the mathematical difference between growth and interest rates will be a key figure to watch, and that it must be kept in positive territory.

Given this priority, the traditional fiscal anchor of debt-to-GDP must be replaced with a target percentage of federal spending dedicated to paying interest on debt. Canada’s debt level will be manageable if the country can get to a point where its target percentage of federal spending for interest payments is down and steady at 1%, the report said.

In order to pay down its debt, the report said Canada has to pursue greater economic growth through increased productivity. In particular, it set out five priority areas for policy to spur economic growth before pre-pandemic projections:

  • Enhancing digitization of production of goods and services;
  • Extending the life of a cleaner resource sector and facilitating a higher value-added composition;
  • Maximizing participation and adaptation of labour force;
  • Enhancing effectiveness and efficiency of public services; and
  • Restoring confidence in fiscal stability

“We need to capitalize on the opportunities presented by our domestic adaptation to COVID and by COVID-induced changes in global demand to reset our strategies for boosting the value-added sectors of our domestic production and by raising productivity,” Dodge said.

 

Follow WP on FacebookLinkedIn and Twitter

LATEST NEWS