July 29, 2021 – The federal debt-to-GDP ratio could easily rise above current peak levels associated with the pandemic, says a new report from the C.D. Howe Institute. Only small changes in assumptions of economic growth and interest rates can significantly alter the course of the projected debt burden.
In “Rolling the Dice on Canada’s Fiscal Future,” authors Alexandre Laurin and Don Drummond explore the sensitivity and fragility of Canada’s fiscal prospects by testing Canada’s future simulated debt burden under alternative scenarios. The authors’ baseline scenario shows the federal and provincial debt burdens on an upward long-run drift with the federal debt ratio rising from 51 percent of GDP in 2021 to reach 60 percent by 2055, and the combined federal and provincial net debt ratio possibly reaching over 140 percent by 2055.
As such, “recent federal and provincial budgets amount to rolling the dice on Canada’s future,” says Drummond, co-author and Fellow-in-Residence at the C.D. Howe Institute.
“We believe the federal budget’s long-term growth assumptions to be optimistic,” write Laurin and Drummond. “Given the amount of uncertainty over prospects, budget assumptions certainly cannot be ruled out. But in leaning toward the optimistic, they do not provide a solid base for planning; plans based upon overly optimistic assumptions put the country at risk. Less optimistic alternatives should be considered in deliberating upon policy.”
The two long-term debt-to-GDP scenarios featured in the 2021 federal budget are based on higher average GDP growth and lower debt-servicing costs than the authors’ baseline assumptions. In contrast to Finance Canada’s favourable scenario where the debt-to-GDP ratio declines to the pre-pandemic level of 30 percent by 2055, Laurin and Drummond’s baseline scenario shows the federal debt burden to rise to 60 percent – double Finance Canada’s projected scenario. Other alternatives keep the debt burden around this year’s peak level for the next three-plus decades, passing forward the fiscal hit from the pandemic not just one, but two generations
The current federal budget plan appears to leave no room for future unfunded spending commitments, and to make matters worse, provincial government debt has spiked during the pandemic and could continue to rise. Above all, according to the authors, this exercise makes one thing clear: fiscal decisions today must be geared towards increasing Canada’s sustainable productive capacity and long-term economic growth rate.
For more information contact: Alexandre Laurin, Director of Research, C.D. Howe Institute; Don Drummond, Stauffer-Dunning Fellow in Global Public Policy and Adjunct Professor at the School of Policy Studies at Queen’s University; or Lauren Malyk, Communications Officer, C.D. Howe Institute, 416-865-1904 ext. 0247, firstname.lastname@example.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.