And with the ‘Opposition’ promising not to balance the budget for a decade, Canada’s ‘leaders’ are showing they lack the will to cut spending and prevent a disastrous situation.
It’s no secret that Canada has a serious debt problem.
In the past year, our debt has surged, with the federal Liberal government rapidly expanding the size of government, propped up only by an historic expansion in the money supply as the Bank of Canada printed money at a stunning pace.
And yet, even this massive surge in spending doesn’t capture the full depth of Canada’s debt crisis.
As a recent Fraser Institute report reveals, when Canada’s ‘gross debt’ is considered, things are far worse:
“The federal government continues to rationalize its debt-financed spending based on international comparisons showing Canada with the lowest level of debt in the G7.
Of the two broad measures of debt, gross debt includes most forms of debt while net debt is a narrower measure that accounts for financial assets held by governments.
By using net debt as a share of the economy (GDP), Canada ranks 11th lowest of 29 countries and lowest amongst the G7. By using gross debt as a share of the economy, Canada falls to 25th of 29 countries and 4th in the G7.
Canada experiences by far the largest change in its indebtedness ranking—falling 14 places—when the measure shifts from net debt to gross debt. Taiwan has the second largest change, an improvement of 7 positions.
One reason for this pronounced change in ranking is that net debt includes the assets of the Canada and Quebec Pension Plans, which have unique approaches to funding public retirement plans: unlike most other industrialized countries, the CPP and QPP invest in non-government assets including equities and corporate bonds.
As of March 31, 2020, according to Statistics Canada data, there were net assets in the combined CPP and QPP of $488.1 billion.
According to IMF data, the difference between Canada’s gross and net debt was approximately $1.5 trillion as at the end of 2019, which means the assets of CPP and QPP explain roughly one-third of the difference.”
As the Fraser Institute notes, this presents a very distorted picture of Canada’s true debt situation:
“This affects Canada’s measurement of net debt. Consider a hypothetical case where a government borrows $1 billion to finance spending while its public pension simultaneously buys $1 billion in bonds. The government’s gross debt increases by $1 billion but its net debt doesn’t change because there’s both an asset (bond held by the pension) and a liability. If instead, the public pension invests in non-government bonds and stocks, net debt decreases by $1 billion—and that’s what’s happening in Canada. Our net debt looks better than it actually is because the assets of the Canada (and Quebec) Pension Plans are included.
This is more than misleading, because governments—provincial and federal—can’t use earnings from assets held by the Canada Pension Plan or the assets themselves for anything other than paying for pension benefits. Indeed, these assets are critical to meeting pension obligations to current and future retirees.”
Avoiding reality doesn’t make it go away
It’s been obvious for some time that the Liberals are living in a fantasy land when it comes to the economy and Canada’s finances.
Their answer to everything is more spending, even as that approach further deepens the vulnerability of our economy and imperils our future.
Unfortunately, the Bank of Canada has abandoned responsible thinking and has instead become an enable for excessive spending.
By keeping interest rates so low, and by printing so much money, they’ve have made it ‘easy’ to finance huge budget deficits.
By contrast, if the Liberal government had to raise the money from private investors, they would have faced more pressure to be restrained.
Now that we see all this spending is itself based on an all-too-rosy picture of Canada’s debt situation, the risk becomes even greater.
Not only is our federal debt a big problem, but Canada is deeply indebted all the way down.
Provincial debt has surged, and even before the crisis Ontario was one of the most indebted sub-national jurisdictions on Earth.
Canada’s corporate debt is also quite high, and our household debt is amongst the worst on the planet – worse even than in the United States before the 2008 financial crisis.
Add to that an economy increasingly propped up by an absurd housing market, and you have a recipe for disaster.
The Liberal government, and much of Canada’s political class seem unwilling to acknowledge this reality, but that doesn’t mean reality will take a break or go away.
Political weakness
In a country facing the danger that Canada has ahead of us, you would expect there to be strong advocacy for large reductions in spending and a quick return to fiscal responsibility.
Such an idea would be based on the fact that continuing to spend irresponsibly, and allowing debt to continue piling up, risks a severe crisis that will have a devastating impact on Canadians.
When spending has been irresponsible for so long, a correction – often a tough correction – is needed to prevent an even worse outcome.
And yet, Canada is beset with political weakness, with ‘leaders’ who lack the will to propose reductions in spending.
Consider that – aside from Pierre Poilievre and perhaps a few others – the Conservative Opposition has proposed continuing the status quo on spending.
While the CPC will often criticize the increase in debt and deficits on the one hand, on the other hand, Erin O’Toole has said he won’t be cutting spending, and won’t balance the budget for at least a decade.
It’s a very bad sign for Canada when even the ‘Conservative’ Party won’t campaign on spending cuts despite deficits that reached into the hundreds of billions of dollars, and are set to stay elevated for years and years to come.
With the Liberals and NDP having fully embraced massive deficit spending – de facto ‘Modern Monetary Theory’ – Canada is left with few voices of fiscal sanity left in positions of power.
A wake up call?
This Fraser Institute report should be a huge wakeup call for our country, showing that our already bad situation is even worse than it appears.
Yet, with so much of our political class sticking their heads in the sand, even this dose of reality may not be enough to rouse them from their dangerous fantasy.
Spencer Fernando
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