In the era of lockdowns to “prevent a healthcare system collapse” Canadians have forgotten that all this money must be paid back – with interest. Inflation is on the rise and it likely won’t get any better soon the way our governments are spending. In addition, the same measures meant to protect our healthcare system may lead to cutbacks within it.
According to the OECD Canada’s general government debt now sits at 106.7% of GDP. This is in contrast to what Pierre Poilievre recently tweeted about the debt/GDP ratio on Twitter where he pegged it at 100.3% – which he says he got from a stats Canada study, but did not cite in his tweet.
What is general government debt?
According to the OECD, general government debt is a “debt-to-GDP ratio” that “measures the gross debt of the general government as a percentage of GDP. It is a key indicator for the sustainability of government finance. Debt is calculated as the sum of the following liability categories (as applicable): currency and deposits; debt securities, loans; insurance, pensions and standardized guarantee schemes, and other accounts payable.”
So in essence, the general government debt is the sum of the currency and deposits, loans, insurance, pensions and standardized guarantee schemes and other accounts that are to be paid. In Canada, this number currently sits between 100.3% (Pierre Poilievre, shadow minister of finance figure) or 106.7% according to the OECD.
What is household debt as a percentage of disposable income?
Household debt as describes by the OECD is “Household debt is defined as all liabilities of households (including non-profit institutions serving households) that require payments of interest or principal by households to the creditors at a fixed date in the future. Debt is calculated as the sum of the following liability categories: loans (primarily mortgage loans and consumer credit) and other accounts payable. The indicator is measured as a percentage of net household disposable income.
The importance of household debt as an indicator of economic health
According to the Federal Reserve “A growing body of research documents the importance of household debt to the Great Recession and subsequent sluggish recovery.” They also noted that counties “in which households were heavily indebted relative to their income” at the beginning of the downturn of the great recession experienced “sharper declines in consumption expenditure and employment.”
Reasons the Federal Debt should concern every Canadian
According to the Committee for a Responsible Federal Budget (CFRB), “The consequences of such high and rising debt could be significant.”
Here is a list of consequences from rising debt they listed;
- Slow income growth;
- Increase interest payments, crowding out other priorities;
- Push up interest rates;
- Dampen our ability to respond to the next recession or emergency;
- Place more burden on future generations; and
- Increase the risk of a fiscal crisis.
Let us address a few of these concerns for Canadians. First, we will start with the increase in interest payments that can crowd out other priorities like healthcare and second, we will discuss the increased risk of a financial crisis.
An increase in Interest payments could crowd out other priorities
It has been something that I have been repeating for months now – lockdown debt may end up leading to cuts in healthcare and other public services that Canadians rely on like police, fire etc. The irony of this is that healthcare is the crux of the argument that the government has presented Canadians as the rationale for their deficit spending.
It’s pretty simple, higher debt means higher interest payments. Higher interest payments mean that decisions will need to be made to address the debt – higher taxes (more burden for the taxpayer), or cuts to spending elsewhere to make the payments. This is where the cuts to public services could come in – perhaps unfunded liabilities like pensions would be looked at as well.
About Canada’s unfunded liabilities
In 2012, the CFIB reported that “based on evidence from Statistics Canada, Public Accounts and other sources, we found the unfunded shortfall for public pension plans across the country likely exceeds $300 billion. That’s $9,000 for every man, woman and child in Canada.”
In December of 2012, The Fraser Institute (an economic thinktank) reported on the unfunded liabilities in Canadian healthcare. In 2010 the unfunded liabilities for Canadian healthcare was over 500 billion dollars.
The reason for the large amount of unfunded liabilities in Canadian healthcare according to the Fraser Institute is “at its inception, this program was based on the assumption that demographics, economic growth rates, and wage increases
prevalent in the 1960s would persist. These assumptions have proven false. Birth rates have declined, income growth has slowed, and mortality rates have decreased.”
I bring up these older reports to highlight the fact that these problems haven’t gone away. Rather, they were still present at the beginning of the lockdowns when the Canadian government decided to shut down the majority of the economy. We already had problems on the horizon.
In December of 2012 The Fraser Institute wrote “unless governments make changes soon, these pressures will likely lead to higher general tax rates or a further reduction in services.” They added that “Canadians must encourage all levels of government to assess the viability of the various programs that currently maintain unfunded liabilities.” The important take away is that the alarm about these unfunded liabilities was sounded almost 9 years ago.
Higher risk of a financial crisis
When more of your money is committed to servicing debt – you have less money available for unexpected shocks. The Guardian said in their article titled “World Bank warns of global debt crisis amid borrowing buildup” that “high debt carries significant risks for emerging and developing economies, as it makes them more vulnerable to external shocks. The rollover of existing debt can become increasingly difficult during periods of financial stress, potentially leading to a crisis.”
As more and more jobs are lost to lockdowns that won’t come back – this possibility becomes greater for nations like Canada as well.
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