Our debt-to-GDP ratio is approaching a level which has previously caused a debt crisis.
Though it’s rarely mentioned these days, Canada faced a debt crisis not long ago.
In the latter part of the 1990’s, our debt was clearly out of control, leading to a loss of confidence in Canada’s fiscal situation, making the cost of debt even higher.
Canada faced a real risk of a debt spiral, where surging debt leads to higher deficits, which leads to higher debt, and on and on.
Canada was able to escape that spiral, through tough decisions made by the Chretien Liberals, who were spurred on to those decisions by the Reform Party & Canadian Alliance who strongly pushed for fiscal restraint.
And now, Conservative Finance Critic Pierre Poilievre is pointing out that Canada’s debt is reaching nearer and nearer to the levels seen in that crisis:
Debt Cliff. pic.twitter.com/Kw711RJ7Ae
— Pierre Poilievre (@PierrePoilievre) December 2, 2020
Some may look at this and think it’s not a huge problem, since other countries have even higher debt loads.
However, two of the most indebted countries – the US and Japan – have unique circumstances.
First, the US has the world’s reserve currency, meaning they can continue to finance higher levels of debt at lower rates. Also, the US economy has been growing much more rapidly than Canada’s in the past four years.
In the case of Japan, a huge percentage of their debt is held by the Japanese People themselves, meaning the country is unlikely to default on debt owed to their own Citizens.
Amid the crisis, while Canada’s debt has gone up in all areas, our amount of debt owed to foreign investors and institutions has risen dramatically.
The government also claims they are ‘locking in,’ low interest rates, but much of Canada’s new debt is relatively short term, meaning there is no guaranteed protection against rate hikes.
And worst of all, the government is pursuing anti-growth ‘green’ policies.
As I’ve said before, an increase in debt to deal with a crisis can be a smart move, and it can be sustainable if the crisis is followed by a surge in GDP growth that lasts. But that is unlikely to happen when the federal government is raising the cost of living, hiking taxes, and slowing growth in key sectors.
In that kind of situation, the debt burden becomes more and more difficult to manage, because the economy isn’t generating the growth to make it affordable.
That’s why Poilievre is right to be warning about this increase in debt, because unless Canada gets a government with a pro-prosperity, pro-jobs, and pro-growth mindset, things will not end well.
Photo – Twitter