By the end of the 2024-25 fiscal year, CanadaSA国际影视传媒檚 total market debt is expected to surpass $1.4 trillion. Every day, this debt grows by more than $100 million, and every second, Canada pays more than $1,200 in interest.
Many Canadians are concerned about the growing deficit, raising concerns that Canada could, once again, be called SA国际影视传媒渁n honorary member of the Third WorldSA国际影视传媒� or see its dollar be called the SA国际影视传媒淣orthern Peso.SA国际影视传媒�
Fifty-five per cent of Canadians think the federal governmentSA国际影视传媒檚 spending is too high. In spite of this, Chrystia Freeland, deputy prime minister and minister of Finance, postponed debt-reduction goals multiple times, and anticipates that the debt-to-gross domestic product (GPD) ratio will keep growing for at least the next two years. For now, it seems the debt burden is here to stay, although the future of the Liberal government is uncertain with the end of the NDP-Liberal supply-and-confidence agreement.
In the meantime, Canada is in a GDP-per-capita recession, a tsunami of mortgage renewals are about to crush in, and the interest rate has just been cut again, to 4.25 per cent, to keep the economy afloat.
The financial `soupSA国际影视传媒�
Understanding national debt is crucial to grasping the gravity of the situation. National debt represents the amount of money a government owes its creditors. Every time a government runs a deficit, it needs to borrow to cover it. Canada runs deficits more often than not.
National debt is measured as a percentage of GDP or on a per capita base. National debt can be measured in different ways, including gross debt, net debt and public deficit. Some measures include just the federal government, while others include the provincial governments.
To illustrate a countrySA国际影视传媒檚 financial system, itSA国际影视传媒檚 helpful to imagine it as a pot of meatball soup. At the bottom of the pot, various factors SA国际影视传媒� social, economic, political and environmental SA国际影视传媒� act as the heat source. Above the pot are the regulatory and oversight authorities.
Inside the pot, the meatballs represent different financial markets, including the stock, real estate, commodities, currency and bond markets. The soupSA国际影视传媒檚 liquid serves as a connective medium that allows these markets to interact. If a meatball (representing a financial market) becomes problematic, it can spoil the entire soup. If the soup is too hot, it burns if itSA国际影视传媒檚 too cold, itSA国际影视传媒檚 unappetizing.
The role of financial oversight institutions is to maintain the soupSA国际影视传媒檚 quality. Too much public debt limits their ability to manage and prevent financial crises effectively. Citizens only become concerned about national debt when it starts affecting the quality of the soup.
Debt accumulation
National debt can be beneficial, but only if its managed properly. Governments collect revenue from different sources and get more money if the economy is growing.
Borrowing money is reasonable when investing and facing economic downturns, but mismanagement can cause problems. At some point, too much debt becomes burdensome and economic growth and private investments slow down.
Periods of debt accumulation are common around the world, with more than 500 episodes occurring since 1970. Around half of these episodes were associated with financial crises.
During these crisis periods, output per capita was typically six to 10 per cent lower and investments were 15 to 22 per cent weaker. A rapid buildup of debt increases the likelihood of a financial crisis occurring, as does a larger share of short-term external debt, higher debt service and lower reserves.
Tackling national debt
Governments have several tools at their disposal to manage fiscal deficits and debt, though each comes with its own set of challenges.
-Governments aim to eliminate fiscal deficits by growing the economy continuously, but this is easier said than done.
-Raising taxes is another option, but economic contraction, high unemployment rates, the costs of implementing fiscal consolidation, debt burdens and an increasing debt-to-GDP ratio can make this approach challenging.
-Financial repression involves government policies that control financial markets. These can include directed lending to the government from domestic institutions like pension funds or banks, explicit or implicit caps on interest rates, regulating cross-border capital flow, and strengthening ties between governments and banks.
-Inflation can be an effective tool because even if creditors are repaid, the value of the goods and services they purchase is significantly lower than when the loan was originally extended.
-Cost cutting can also be a possibility, but governments are often reluctant to do so because it can lead to significant changes in policy, operations and administration which, in turn, may undermine long-term goals.
-Other financial strategies include transferring loans, postponing and reimbursing restrictive debt withdrawal rights, leasing or revising interest rates as authorized in the debt market, domestic financial sector transfers, fiscal consolidation and debt restructuring.
National debt around the world
The past offers us a stark example of the dangers of unsustainable financial policies. In the wake of the 2008 financial crisis, Portugal, Italy, Ireland, Greece and Spain all saw their national debts downgraded to SA国际影视传媒渏unk statusSA国际影视传媒� after being burdened with enormous sovereign debt, real estate bubbles and unreported fiscal deficits.
In response, they were forced to implement harsh austerity measures, tax increases and spending cuts. These actions, in turn, sparked widespread social unrest.
In the present day, ArgentinaSA国际影视传媒檚 President Javier Milei is taking a bold approach to address the countrySA国际影视传媒檚 rampant inflation, which has reached 211 per cent year over year. Milei has brutally cut expenses and public deficit in an effort to curb the spiral.
The United States presents a different case altogether. It holds all its debt in U.S. dollars, meaning it will always be able to pay them. Japan, on the other hand, is the most indebted country in the world, and faces serious challenges because of it.
Around the globe, other countries face their own unique challenges: Zambia has borrowed too much to afford infrastructure, Ecuador is burdened by excessive subsidies, El SalvadorSA国际影视传媒檚 adoption of Bitcoin has led to its long-term debt being traded at a 70 per cent discount, and about 30 per cent of KenyaSA国际影视传媒檚 revenues go to interest.
Canada versus the world
If anything distinguishes Canadian finances from its G7 peers, it is itSA国际影视传媒檚 pervasive ambivalence. As the senior director of Canadian economics at Desjardins Group notes: SA国际影视传媒淐anada still remains the cleanest dirty fiscal shirt in the closet.SA国际影视传媒�
Canada typically focuses more on net debt SA国际影视传媒� a measure that looks at gross debt minus the governmentSA国际影视传媒檚 financial assets SA国际影视传媒� because it presents a less alarming picture. CanadaSA国际影视传媒檚 net debt-to-GDP ratio is around 13.28 per cent, significantly lower than the G7 average of 95 per cent.
However, CanadaSA国际影视传媒檚 gross debt-to-GDP ratio stood at about 104.7 per cent in April SA国际影视传媒� higher than Germany or the United Kingdom. Canada is more fiscally vulnerable than the U.S. or Germany, as its economy is smaller and its currency not a reserve currency.
In the typical Canadian duality, the country has a growing economy, but a recession per capita. National debt looks favourable in net terms, but is alarmingly high in gross terms. CanadaSA国际影视传媒檚 leaders need to resolve these dualities SA国际影视传媒� before its currency gets called the SA国际影视传媒淣orthern PesoSA国际影视传媒� again, like it did in the mid-90s.
SA国际影视传媒擝y Sorin Rizeanu, assistant professor, Gustavson School of Business, University of Victoria. This article was originally published on The Conversation, an independent and nonprofit source of news, analysis and commentary from academic experts.
