PUBLIC DEBT

Government support for individuals and businesses during the pandemic led to an unprecedented surge in public debt. After running a $335billion deficit in the previous fiscal year and a projected $138-billion deficit this year, federal debt is expected to approach $1.2-trillion this year, about 48 per cent of gross domestic product, according to Parliamentary Budget Officer estimates. None of the major parties has pledged to rein in spending significantly or raise taxes substantially.

With interest rates at record lows, the cost of servicing the growing debt load remains manageable, particularly when compared with the debt scare of the 1990s. But interest rates will inevitably rise in the coming years as central banks push back against inflation and withdraw stimulus. That will increase debt-servicing costs as bonds roll over.

Furthermore, all the parties are relying on optimistic economic growth projections to shrink public debt relative to the size of the economy over time. Robust growth is not guaranteed, particularly as the population ages and Canada continues to struggle with low productivity growth. As Bank of Montreal chief economist Douglas Porter put it in a recent note to clients: “Governments not repairing finances now, during an economic recovery, could leave them woefully vulnerable to the next major challenge.”