With debt, deficit numbers out, experts say Liberals need plan for growth

Borrowing will push the federal debt past $1 trillion by the end of the fiscal year

OTTAWA — The Trudeau Liberals’ fiscal update this week put a cost to all the emergency COVID-19 aid the federal treasury will dole out. It delivered some shocks: a gigantic deficit and a projection that the federal debt will top $1 trillion.

What is causing the federal deficit to hit $343.2 billion?

Late last year, the government forecast this year’s deficit at $28.1 billion. But the federal government is staring at a rapid drop in revenues due to the economic lockdown slashing the taxes people and businesses pay: that alone adds $81.3 billion to the deficit. Spending spiked by $236 billion for measures such as the $500-a-week emergency benefit for people whose work vaporized.

Combined, that borrowing will push the federal debt past $1 trillion by the end of the fiscal year.

Former parliamentary budget officer Kevin Page, in a post on Finances of the Nation, a website run by researchers and tax professionals, summed up what all that debt will mean for the government. He said future generations will pay for it through a mix of higher debt interest payments or taxes, ”less fiscal room to address the next pandemic crisis or climate change,” or “less generous government programs.”

What’s the interest like on that debt? Can we afford it?

“Ironically, it’s not as hard as you think, thanks to record-low interest rates,” said Sherry Cooper, chief economist at Dominion Lending Centres, a big mortgage company.

The government can borrow money for five years at less than 0.6 per cent interest, for 10 years at just slightly higher, and for 30 years at a touch over one per cent, she said, which makes the cost of carrying the debt less today than it was one year ago.

“It’s even less of a problem because the Bank of Canada is buying so much of it,” Cooper said of federal debt, referring to the $5 billion in federal bond purchases the bank is making weekly as a form of low-cost loans.

“So you have a buyer of last resort which will keep a lid on interest rates at least for the next year.”

The government calculates lower rates will save it $4 billion on debt charges this year. Finance Minister Bill Morneau said Wednesday the government is going to increase its issuing of long-term bonds to 26 per cent from 14 per cent of offerings to capitalize on rates and help manage the debt.

Rates are eventually going to go up, though, and when they do, so will the amount taxpayers shell out on interest.

Are taxes going to have to go up?

Morneau rejected that idea for now, saying hiking taxes would cause more financial hardship. The New Democrats have asked for a wealth tax on the top one per cent, which the parliamentary budget officer calculated this week could net $5.6 billion.

Cooper said raising taxes while the economy is still recovering wouldn’t be wise because it would make Canada less competitive, which would make it more difficult to raise the necessary revenues to pay off the debt. That leaves another option, she said: Grow our way out of it.

How does that work?

The idea is as the economy grows, there will be more workers and companies paying taxes. The same debt, in raw dollars, is less of a burden on a bigger, more prosperous economy. The Liberals have favoured the “debt-to-GDP ratio” as a measure of the government’s fiscal health for exactly this reason.

In their fiscal snapshot, they predict that ratio will shoot up from 31 per cent last year to 49 per cent this year. Though that’s a big increase, the ratio peaked at just under 70 per cent in the mid-1990s.

To help growth along, government will need to spend on things like high-speed internet, Cooper said, or growing sectors like clean energy. Experts also note a need for greater government spending on child care to help mothers whose job losses have been greater, and returns to work slower, than fathers’ during the pandemic.

Even a best-case growth scenario may not be enough to keep the debt sustainable, said Rebekah Young, director of fiscal and provincial economics at Scotiabank, saying more “decisive action” is needed.

“If we don’t keep spending and we don’t get hit again like a depression type of growth scenario, then in theory we can grow out it, but that shouldn’t be enough,” she said.

What other actions could the government take?

Cutting spending is where most eyes will go, and Morneau promised another update or budget come the fall. Research suggests cutting spending, rather than raising taxes, is better at aiding growth out of a recession. It’s also less politically problematic than raising taxes, Young noted.

Tightening purse-strings too early could hamstring the Bank of Canada into keeping rates lower for longer, Young said, which would limit its ability to respond to whatever crisis comes next.

If spending is brought under control relatively soon, the debt should be sustainable, RBC chief economist Craig Wright and economist Colin Guldimann wrote in a report this week. If not, “the red ink could keep flowing,” highlighting the need for careful moves in the coming months.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Rieley Kay owns both Moe’s Pizza and Cilantro and Chive which are businesses located in downtown Lacombe. (Alannah Page/Lacombe Express)
City of Lacombe announces updated plans for downtown redevelopment

The plan would see $1.7 million spent on the downtown over the next 10 years

"We are looking seriously at the spread and determining what our next steps should be," says Alberta’s chief medical officer of health, Dr. Deena Hinshaw, as the daily number of COVID-19 cases continues to climb.
427 new COVID cases is highest in Alberta ever

Central zone has 126 active cases of COVID-19

The Lacombe Food Bank is still seeking donations for non-perishable items. (Alannah Page/Lacombe Express)
Fraserway RV donates $20,000 to Lacombe Food Bank

Fraserway RV is Canada’s largest RV dealership and has stores across the country including one in Lacombe.

JJ Collett Natural Area Foundation held its AGM on Oct. 19 at the Ponoka Legion. (Emily Jaycox/Ponoka News)
De-listing Alberta parks creates ‘risk’ for coal mining: CPAWS

Canadian Parks and Wilderness Society speaks at JJ Collett AGM

The City of Lacombe hired the consulting company, Moorhouse and Associates, to carry out research for phase one of the Social Master Plan. The plan will help the city to learn what areas need the most support. (Alannah Page/Lacombe Express)
City of Lacombe announces first-ever Social Master Plan

The plan aims to discover what services need the City’s attention over the next five years

B.C. Liberal leader Andrew Wilkinson, B.C. NDP leader John Horgan and B.C. Greens leader Sonia Furstenau. (Black Press Media)
VIDEO: One day until B.C. voters go to the polls in snap election defined by pandemic

NDP Leader John Horgan’s decision to call an election comes more than a year ahead of schedule and during a pandemic

A Le Chateau retail store is shown in Montreal on Wednesday July 13, 2016. Le Chateau Inc. says it is seeking court protection from creditors under the Companies’ Creditors Arrangement Act to allow it to liquidate its assets and wind down its operations.THE CANADIAN PRESS/Ryan Remiorz
Clothing retailer Le Chateau plans to close its doors, files for CCAA protection

Le Chateau said it intends to remain fully operational as it liquidates its 123 stores

U.S. border officers at the Peace Arch crossing arrested two men on California warrants this week. (File photo)
Ottawa predicts system delays, backlogs unless court extends life of refugee pact

Canada and the United States recognize each other as safe places to seek protection

Conservative member of Parliament Michelle Rempel Garner, left to right, Conservative Leader Erin O’Toole and Conservative Deputy Leader Candice Bergen arrive to hold a press conference in Ottawa on Thursday, Oct. 22, 2020. THE CANADIAN PRESS/Sean Kilpatrick
No-confidence showdown over sweeping Tory motion on government handling of pandemic

The Conservative motion is to be put to a vote Monday and has the support of both the Bloc Québécois and NDP

From l-r., first lady Melania Trump, President Donald Trump, moderator Kristen Welker of NBC News, Democratic presidential candidate former Vice President Joe Biden and his wife Jill Biden on stage at the conclusion of the second and final presidential debate Thursday, Oct. 22, 2020, at Belmont University in Nashville, Tenn. (AP Photo/Patrick Semansky)
Trump, Biden fight over the raging virus, climate and race

Republican president declared the virus, which killed more than 1,000 Americans on Thursday alone, will “go away.”

COVID-19. (Image courtesy CDC)
Temporary COVID-19 testing sites coming to Wetaskiwin and Ponoka

The Wetaskiwin location will open Oct. 23, 2020 and the Ponoka location will open Oct. 29.

ACC President and CEO Ken Kobly spoke to Ponoka Chamber of Commerce members over Zoom on Oct. 20. (Image: screenshot)
Alberta chambers are ‘411’ to members, government: ACC president

Changes to government supports, second wave and snap election

Smartphone showing various applications to social media services and Google. (Pixabay photo)
National media calling for level playing field with Google, Facebook

In Canada, Google and Facebook control 80 per cent of all online advertising revenues

RCMP. (Black Press File Photo)
Calgary man dies in two-vehicle collision near Sylvan Lake

A semi truck collided with a SUV just east of Hwy. 781 on Hwy 11.

Most Read