Around the world, the economic crisis caused by the restrictions taken to fight COVID-19 has consequently led to an increase in the public debt of the United States. Canada doesn’t escape this phenomenon. Based on the IMF’s data, Canada’s gross debt of the general government (federal and provincial) is about $2,472 billion CAD representing 114.6% of the GDP in 2020. In comparison, in 2019, the gross debt was about $2,041 billion CAD, representing 88.6% of the GDP. This situation shows a necessity to take care of the government budget and not harm the citizens and the taxpayers because it will be them who will pay if the debt is not controlled.
A growing debt with a budget deficit
With a small growth of 1.7% of GDP in 2019 and a recession of -7.1% of GDP in 2020, Canada has to face an economic crisis with increasing debt. If every country faces the same situation, the proportion of the crisis is different between the countries. The Canadian recession is harder than, for example, the USA (-4.3%), Germany (-6%), Sweden (-4.7%), or Ireland (-3%). With this situation, the country is even more vulnerable to degraded public finance due to lower tax revenues. The problem is that the Canadian Government was not the best prepared for this crisis. It has a structural deficit from 2017. If, before the crisis, it was lower than the other G7 countries except for Germany, which had a surplus, the expenditures during the crisis have worsened the deficit considerably. In 2020, Canada would have a deficit of -16% of GDP, the worst of the G7 members.
With this deficit, it is not surprising that the Government’s gross debt rises 16% of the GDP between 2019 and 2020, making Canada one of the most indebted states of the Western world. Indeed, only the US, the countries of Southern Europe (France, Spain, Italy, Greece, and Portugal), and Belgium have a debt representing more than 114.6% of the GDP.
The problem is the debt is a burden for the people of the country. Since the vast majority of state money comes from taxpayers’ money, the former’s indebtedness has an indirect impact on the population. With the federal debt currently at $984 billion CAD, each Canadian is indebted of nearly $26,000. Moreover, with the provincial debts (from $11,000 per capita for Saskatchewan to $26,000 for Ontario), Canadians are indebted between $37,000 and $52,000.
High debt is not a fatality: The Scandinavian countries show the way
A lot of people wanting a more social-based model of governance take the Scandinavian countries as an example. But these Nordic countries reveal themselves to be very careful about their budgets and public expenses. Indeed, in the second quarter of 2019, Denmark had a gross debt of 34.7% of its GDP, and Sweden 35.8%. In the second quarter of 2020, Denmark is predicted to have its debt at 41.4% of its GDP, and 37.1% for Sweden. Accordingly, these countries had low debt before the crisis, but they arrived to avoid an important rising during the crisis.
Their secret? Budget disciplinary to not have deficits and have at least a balanced account. Indeed, these two countries have a surplus from 2016: Denmark had even one of 3.8% of GDP in 2019. This favourable situation can be related to the existence of debt brake systems in their legal systems. In these countries exists a legal obligation for local governments to present a balanced budget. Moreover, in Sweden, a fiscal policy framework is used to force a discipline: “Each year, the Government must give an account of the development of the consolidated gross debt, which is to be presented in the Spring Fiscal Policy Bill. If the consolidated gross debt deviates by more than 5 percent of GDP, the Government must present a communication to the Riksdag (Swedish parliament) explaining the cause of the deviation and how it will be managed.” Plus, the Swedish system has not had a gross debt representing more than 35% GDP.
Canada must take Scandinavian countries as an example for the future management of its debt. They also show that controlling public expenses and promoting a balanced budget is compatible with a social state. Indeed, the growing debt is not a guarantee of better public policies.
Alexandre Massaux is a research associate with the Frontier Centre for Public Policy.
Photo by Michael Longmire on Unsplash.