It has become routine, every morning around 11:15 a.m. EDT thousands of Canadians gather around their television sets to hear the daily national briefing. Closely watching as our national leaders soberly descends down the stairs and step up to the microphone. Citizens and mainstream media all wait with bated breath to learn about the nation’s COVID state of affairs, and whose turn it is to receive financial aid. A million here, a billion there, here a million, there a billion, well you can fill in the rest. Over the past 48 days the overall total economic relief measures announced come to approximately $817+ billion, more specifically:
- $300 billion to the Office of the Superintendent of Financial Institutions (OFSI) to free up capital for the banks;
- $200 billion through the Bank of Canada and Canada Mortgage and Housing Corporation (CMHC) for liquidity support;
- $85 billion for income and sales tax deferrals;
- $286 billion directly to businesses, workers, and the agricultural sector.
Our political decision-makers have reassured the public there is no limit to the measures that will be taken to flatten the curve, and they certainly have demonstrated it. In the meantime, the mainstream media, public officials, bureaucrats, and social media have done a stellar job informing, reminding, and lecturing the public of the seriousness of this catastrophic health crisis. However, very few have focused on the financial aftermath of the “flatten the curve” strategies taken by governments.
The measures taken over the past 48 days have revealed many real public policy challenges that have been percolating under the surface of our social media utopia. Shaken hard back to reality have been things that we have taken for granted, such as freedom of “physical” assembly, freedom of mobility, the education curriculum, workplace environments, financial security, debt levels, and our economic independence.
The pre-COVID national debt was approximately $685.5 billion. The post-COVID national debt is estimated to reach $900 billion-plus. Without any context, most people would probably admit that these numbers really do not mean much to them. So to put it into some perspective, based on the Canadian government’s fiscal performance over its existence, the government of Canada will never pay off the debt!
Many may argue never say never, simply pay off little bits at a time and eventually it will be paid off. Unfortunately, the numbers simply do not work.
Consider the oldest country in the World, San Marino, recognized as an independent state in 1631. This year the country will celebrate its 389th anniversary of existence. Suppose Canada is lucky enough to survive as long, say another 250 years, to pay off $900 billion dollars (which does not account for interest or inflation which one could estimate being 3% and 2%, respectfully) the Canadian government would need to pay approximately $3.8 billion every year for 250 years, that’s doable, right?
However, suppose Canadians did not want the next 9-10 generations to pay off this debt, rather they wish to limit it to the millenials great-grandchildren, or say 80-85 years, the Canadian government would need to pay at least $10 billion per year (again assuming no interest or inflation), that’s doable, right?
Nope! Not according to the Canadian government’s fiscal performance over the past 153 years.
The cold harsh splash of reality is, today’s 26-40-year-olds, their kids, grandchildren, and great-grandchildren will all be faced with lifetime debt assuming nothing else goes wrong, say another pandemic or housing bubble crisis for the next 82.5 years in a row. Is that doable?
Today’s marketplace and available financing options for cars, boats, housing, tuition, cell phones, computers, televisions, almost everything seems to be taking on lifetime plus financing. So unpayable government debt levels may naturally elicit the classic eye-roll and shoulder shrug along with a “who cares?” viewpoint.
Most people know if you do not pay off private debt, your creditors are entitled to seize your assets and cut you off. However, when it is the government itself that owes the money, it’s a different situation.
When a government defaults on its unsustainable debt it causes many spillover effects which may not be readily apparent to most. These effects include a drop in economic growth between 2%-6% per year which results in 4%-12% more unemployment (see Okun’s Law); trade volumes fall by about 7% per year lasting 10+ years; foreign direct investment drops up to 2% of GDP per year; the stock market value of domestic business significantly reduces in particular for exporters; domestic businesses find it more difficult to access foreign capital markets; the cost of borrowing increases, as well as the cost of imported inputs, increase. Falling trade volumes, increasing borrowing costs, and rising prices of imported inputs, domestic businesses shift away from using imported inputs to using domestic inputs which causes efficiency losses in domestic production (by using resources to produce things we are not good at) which lowers economic growth even more.
The more apparent the spillover effect is the damage government defaults caused to banking and other institutions who hold large amounts of government debt. This type of damage became quite apparent during the Eurozone crisis, such that there is a consensus that heightened sovereign default risk in economies with a large financial sector (like Canada) can result in an aggregate credit shortage and possibly a banking crisis.
It is important to note, especially for 26-40-year-old Canadians, the financial sector includes major bondholders, such as investment funds (like the one your parents and grandparents have their life savings in) and pension funds (like the one you’re relying on for your own retirement).
So “who cares?” I guess it depends on how you view yours, your children’s, and your grandchildren’s future, as well as, your thoughts about your parents and grandparents’ economic independence and financial well-being.
It might be time to seriously contemplate how to flatten the “debt” curve once we get through flattening the COVID one.
Gerard A. Lucyshyn is the Vice-President of Research and a senior fellow with the Frontier Centre for Public Policy.