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Canada borrows with no regard for tomorrow. The next crisis may break us
Christopher Ragan warns Canada's borrowing leaves it less prepared for the next big economic crisis, such as a war or pandemic.
Key points
- Federal net debt-to-GDP is about 45 per cent, or about 75 per cent including provincial debt.
- G7 10-year government bond yields rose by more than 100 basis points over the past year.
- In 1995 Canada lost bondholder confidence with a combined debt ratio of 99 per cent, forcing budget cuts.
Why it matters. Ragan argues that if bond buyers doubt Canada's fiscal plan or inflation control, higher yields could force sudden spending cuts or rushed tax increases.
In an essay ahead of the Nov. 5 federal budget, Christopher Ragan says governments must keep their borrowing power for crises. Federal net debt is about 45 per cent of GDP, below the 1996 peak of 72 per cent but above the 32 per cent low before 2008. Ragan notes G7 10-year bond yields rose by more than 100 basis points over the past year. Canada lost bondholder confidence in 1995, when combined debt was 99 per cent, and faced forced budget cuts.
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Canada borrows with no regard for tomorrow. The next crisis may break us
Governments must manage debt levels and maintain a credible fiscal plan Christopher Ragan is the Max Bell Foundation Senior Fellow at the Institute for Research on Public Policy and the author of “Keeping Our Fiscal Powder Dry: Why Rising Public Debt Leaves Canada Less Prepared for the Next Crisis,” published by the C.D. Howe Institute. This essay is part of the Prosperity’s Path series. In a time of geopolitical instability and a shifting world order, the challenges facing Canada's economy have only gotten more visible, numerous and intense. This series brings solutions. As we approach the federal budget on Nov. 5, our thoughts may naturally turn to the level of government spending, the size of the inevitable deficit, and whether overall public indebtedness will continue rising. The federal government’s net debt-to-GDP ratio stands at about 45 per cent today, well below its peak of 72 per cent from 1996, when Canada had just hit the “debt wall.” But the figure is still significantly greater than its low point of 32 per cent just before the 2008 financial crisis. And if we add in all the provincial government debt, the overall debt ratio is a lot higher – about 75 per cent. How much debt is too much? Consider our collective preparedness for the next big economic crisis, such as a war or a pandemic or a financial crisis. I begin with the premise that our governments should spend.