Opinion: Canada’s economy: over-indebted and underperforming

Despite leading in debt accumulation, Canada lagged behind most of its peers on key economic indicators.

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During the pandemic, countries around the world racked up significant debt in an effort to support their economies. In Canada, programs such as the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Response Benefit (CERB) cost hundreds of billions of dollars. Canada ranked second to Japan among industrialized countries in the scale of our government lending during the pandemic. However, all that borrowing did not translate into stronger economic performance compared to our peers.

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Even before COVID, Canada’s gross debt position (a measure of total government borrowing) relative to the size of the economy was not great. In 2019, according to the International Monetary Fund (IMF), Canada had the 10th highest gross debt as a percentage of GDP (87.2 percent) among 33 industrialized countries. By 2021, that number rose to 112.1 percent, an increase of 24.9 percentage points, the second largest increase in gross debt as a share of the economy among the 33 countries, again behind only Japan.

What does that mean for Canadians?

Given the huge increase in our debt, many observers believed that Canada’s economy would do better than others. Unfortunately, the data does not confirm this. As noted in a new to study published by the Fraser Institute, in 2020 and 2021 Canada underit performed relative to our peers in both economic growth and unemployment.

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For the overall economy, Canada ranked 21st out of 33 countries, with an average negative GDP growth of 0.3% (adjusted for inflation) in 2020 and 2021. In other words, nearly two-thirds of our peer group, including the United States and Australia, did better than Canada. Ireland, which actually reduced its gross debt-to-GDP ratio between 2019 and 2021 led all 33 countries in inflation-adjusted GDP growth.

Our unemployment performance was even worse during the same two years. Of the 33 countries, Canada had the fifth highest average unemployment rate in 2020 and 2021, behind only Greece, Spain, Italy and Sweden. (The IMF data is standardized to allow comparisons across countries.)

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Put simply, despite leading the debt buildup, Canada lagged behind most of our peers on key economic indicators. And the accumulation of debts has consequences. All things being equal, more debt means more tax dollars go toward paying interest on debt, leaving less money for health care, social services, and/or tax relief. Interest payments on federal debt alone will cost Canadian taxpayers approximately $180 billion through fiscal year 2026-27, and this assumes lower interest rates than are likely to exist, given the Bank of Canada’s stated intention to control inflation. As interest rates rise, interest costs on government debt also rise, all else being equal.

The accumulation of debt can also cause, not only complicate, inflation. When the central bank buys government debt to finance spending, as it did in Canada during the pandemic, prices generally rise.

Instead of delivering the superior growth and employment performance that many people expected of it, the massive buildup of debt during the pandemic simply imposed more costs on Canadians.

Tegan Hill and Milagros Palacios are economists at the Fraser Institute.

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