Guest editorial

Canadians are staring into a debt abyss.

Ayear ago, Canada had a budgetary surplus of $3.6 billion. The unemployment rate was 5.6 per cent. A month later COVID-19 changed everything. General lockdowns began, and the deficit exploded; $14.8 billion in red ink in March, and a combined $86.8 billion for April and May, the first two months of the new fiscal year (FY) 2020-21. COVID-19 cases are now near 820,000 with more than 21,000 Canadians deaths. While the economy has emerged from the coma it entered last spring, specific sectors such as travel, tourism, airline travel, hospitality and arts and entertainment remain moribund. Overall GDP growth this year will contract by 5.8 per cent. The Bank of Canada projects growth of about 4 per cent in 2021 as vaccine campaigns are anticipated to accelerate, and close to 5 per cent in 2022.

So how bad are the deficit and debt numbers? Canada closed the books on the 2019-20 FY with a deficit of $39.4 billion: relatively small in the context of a G-7 economy, but still jarring. Truly prudent economic stewardship would have seen the government running, at the least, small surpluses. It bears repeating that in losing the 2015 election to Justin Trudeau’s Liberals, the Harper government bequeathed a balanced federal budget. Our $39.4 billion deficit last year has decupled (X10) to $381.6 billion as projected in the Fall Economic Statement. In lock-step, the accumulated federal debt has galloped from $721.4 billion to a projected $1,107.4 billion – or in layman’s terms, more than $1.1 trillion. This figure does not include an additional $70-100 billion in stimulus that the government has indicated it will spend over the next three FYs. The government will also amend the Borrowing Authority Act to pump up the limit on borrowing to $1.831 trillion; 50 per cent higher than the previous limit which was eclipsed earlier this year as Parliament approved emergency spending powers in order to deal with the crisis.

Governments in Canada have borrowed massively to support household incomes and businesses through the pandemic. Rock-bottom financing rates will help governments manage the near-term challenges associated with the additional debt burden, but the ramifications of this massive and sudden buildup in public debt are inescapable over the longer term.

This new debt burden is truly generational. The Parliamentary Budget Officer has determined the principal on the federal debt will not begin to be paid down until 2061. Graduates of the class of ’21 will be pondering retirement by that time!

The federal government has financed this massive fiscal response and deficit, with the sale of Government of Canada bonds. What is different this time is that rather than bonds remaining recorded on the balance sheets of commercial banks, the Bank of Canada buys these bonds from for instance, the chartered banks on the secondary market. The Bank then creates electronic deposits with the chartered banks – termed settlement balances – which the banks in turn lend out to their customers. Termed Quantitative Easing (QE), this process of internal banking industry sausage-making, coupled with the Bank’s overnight interest rate of 0.25 per cent, is also tied to the Bank’s inflation goal which is to maintain inflation within a narrow band of 1-3 per cent annually, with 2 per cent being the sweet spot. While high inflation as witnessed in Canada during the 1970s and early 80s is destructive, a lack of inflation or deflationary pressures in the economy is also troublesome.

Through QE, the Bank of Canada has bought more than $300 billion in Government of Canada bonds since March 2020. Prior to COVID-19, the Bank held just $76 million in government bonds. Overall, the balance sheet of the Bank of Canada has grown from about $120 billion in March 2020 to $548 billion in December 2020. And the Bank will continue to buy $4 billion a week in government bonds for the foreseeable future.

So, should we be worried? Interest rates on borrowing is at historically low levels with the government paying as low as 0.25 per cent (negative if we factor in inflation), charges on the federal debt actually fell this year. And as a per centage of GDP, public debt charges will only rise marginally from 0.9 per cent this year to 1.2 per cent by 2025-26. The IMF believes the Canadian federal response has been comprehensive, largely coherent, and alleviated the financial pain felt by millions of Canadians. But the bill will come due. And it will have to be paid n

publisher/managing editor Dan Donovan

art director & web editor Karen Temple

social media manager Kat Walcott

cover photo by Sean Sisk Photography make-up: Corey J. Stone

photographers Mika Baumeister, Khristina Debrouin, Sean Sisk, Jessica Thomas, Kim Woolgar, Clark Van Der Beken

fashion editor Alexandra Hunt

accounts Joe Colas C.G.A bookkeeper Joan MacLean

contributing writers Michael Bussière, John Scott Cowan, Sid Cratzbarg , Sofia Donato, Mckenzie Donovan, Grace Giesbrecht, Matt Horwood, Alexandra Hunt, Helen Long, Greg MacDougal, Aaron Nava, Steve Saunders

web contributors Susan Alsembach, Luke Barry, Adele Blair, Sofia Donato, Mckenzie Donovan, Dave Gross, Jennifer Hartley, Ryan Lythall, Owen Maxwell, Kate More, Zarha Nafal, Aaron Nava, Rusel Olsen, Mona Staples, Kat Walcott, Keith Whittier

social media Kat Walcott

student intern Grace Giesbrecht

corporate advisor J. Paul Harquail, Charles Franklin

corporate counsel Paul Champagne editor in memoriam Harvey F. Chartrand

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