“Yes, Let’s work together”

Brenda Schimke
Written by Brenda Schimke

Not all debt is equal, some grow the economy and wealth, and other debt takes us down. It’s understanding which debt is good and which is not that makes or breaks governments, households, individuals and businesses.

Excessive household, small business and consumer debt is bad and often unsustainable when economic blips happen. The same can be said for municipal debt. None of these entities have the power to increase revenues during an economic downturn.

Provincial governments, on the other hand, are in a stronger position. They have many levers of power that enable them to stimulate economic growth in a downturn and still maintain a sustainable debt to gross domestic product (GDP) ratio, especially with such low interest rates. (Debt to GDP is equivalent to a household’s debt to annual income.)

The federal government stands alone in its ability to borrow and sustain debt, but they, too, can reach unsustainable debt levels as witnessed in the 1970s, 80s and early 90s. The federal government borrowed money at high rates (interest rates on debt was on average four percentage points higher than revenue growth), and most of that debt was structural—year after year program commitments.

Finance Minister Paul Martin’s second budget in 1995, slashed program spending and within three years Canada’s debt-to-GDP ratio was reduced from 65 per cent to 30 per cent.

Before the coronavirus pandemic, the federal government had a modest budget deficit of one per cent of GDP, and a debt-to-GDP ratio of 31 per cent—it’s why economists and the Bank of Canada Governor keep assuring Canadians, we have the capacity for this one-time spending spree.

Today’s deficit spending is not stimulus, it’s not structural, it’s emergency recovery spending. That’s why there was unanimous support in the House of Commons to expand government spending to unprecedented levels not seen since World War II (WWII).

Temporary support measures, although far from perfect, will sustain the majority of people and businesses from complete disaster, keep our population healthy, stop many from having to go deeper in debt, and keep our economy positioned to come out of the pandemic relatively quickly.

Approximately 60 per cent of the projected 2020 federal deficit is due to these temporary recovery measures. Another 30 per cent is cyclical reflecting economic loss during shutdowns. As with WWII spending, the government’s unprecedented deficit financing will stop after the pandemic is tamed.

Wealthy countries such as Canada get rid of debt when economic growth is even slightly larger than the cost of debt. After WWII, Canada’s debt-to-GDP was 109 per cent. Low interest rates and economic growth quickly evaporated that debt and got our debt-to-GDP ratio back in line.

International investors are bullish about Canada. Statistics Canada reported, in the first quarter international investors bought $39 billion of federal government and corporation debt and in the single month of April, a stunning $54 billion. It’s another clear indication that Canada is fiscally well-managed and considered a safe and prudent place to weather storms—as was proven during the 2008 economic crisis.

Citizens hyper-ventilating about the size of the recovery-generated deficit are being purposefully distracted. Our focus should be on our personal debt loads and what the government is doing to grow and diversify our economy for the 21st Century.

Citizens hyper-ventilating about the size of the recovery-generated deficit are being purposefully distracted. Our focus should be on our personal debt loads and what the government is doing to grow and diversify our economy for the 21st Century.

The recent agreement between Ford Motor Company and the Governments of Ontario and Canada to build electric cars and batteries is a perfect example.

There are many 21st Century projects in Alberta complementary to hydrocarbons— hydrogen energy, carbon capture, carbon-reducing technology, industrial plastic recycling—any of which the feds would happily work with the Alberta Government to grow.

Premier Kenney just has to say, “yes, let’s work together”.

 

Brenda Schimke

ECA Review

About the author

Brenda Schimke

Brenda Schimke

Schimke is a Graduate with Distinction from the University of Alberta with a BCom degree. She has lived and worked in Alberta, BC and Ontario.

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