Throne Speech: Time to Talk about Debt

The upcoming Speech from the Throne is more than just an address opening the new session of Parliament. It is a chance for the government to address Canadians’ growing doubtfulness of their social safety net and economic future. Amidst a global pandemic, economic crisis, and a political ethics scandal, the Federal Liberals have a plethora of talking points to choose from. Pharmacare and guaranteed livable income are some of the many ambitious spending programs that are speculated to be unveiled as the Throne Speech addresses Canada’s plan for economic recovery. However, this plan will merely give Canadians false assurance if it does not include a strategy to reduce Canada’s unsustainable deficits.

The government’s deficit is expected to rise to a staggering $343.2 billion this year from the $34.4 billion projected before the pandemic. Much of this was used to hold Canadians and businesses afloat during the economic shutdown. While this spending was and is essential for the welfare of Canadians, it has had a large impact on the country’s debt burden. The IMF estimates that Canada’s net debt will reach 40% of GDP in 2020 (up from 26% the previous year), but this figure is largely underestimated due to generous accounting principles. These practices include holding both financial and non-financial assets at book-value and excluding government employee pension plans as liabilities. Canadian economist, Jack Mintz, estimates that if we reverse these practices and consider that many government programs, such as Old Age Security and the Guaranteed Income Supplement, are, in fact, unfunded liabilities, then the true net debt to GDP ratio is as high as 166%.

Although Canada’s fiscal debt remains far from out of control, it has not gone unnoticed. Citing “significant fiscal deterioration,” the credit rating agency Fitch downgraded Canada’s AAA credit rating to ‘AA+’ in June – prior to the release of Canada’s fiscal snapshot in July. While ultra-low interest rates continue to make Canada’s debt manageable, this could change if Canada does not develop a plan towards fiscal consolidation. Further credit downgrades would only make Canada’s extensive issuance of short-term debt more vulnerable to sudden increases in interest rates. The Bank of Canada already rolls over $100 billion of debt each quarter. Although Canada plans to increase its issuance of long-term debt to finance the budget deficit, outstanding Treasury Bills are still expected to increase to $294 billion this year, a 94% increase from the end of March.

Despite the growing deficit, Canada must undoubtedly spend more in order to aid its economic recovery. However, merely spending to stoke consumer demand is neither sustainable nor what Canada needs. The government must begin making investments that will substantially increase productivity if it ever wants to stay on top of its debt burden. Predictions that the Throne Speech will include increasing financial support for childcare have spurred calls for a national universal childcare program. Supporters claim that this program would reduce the astronomical fees faced by parents, the disproportionate impact this recession has had on women, and would also raise productivity by increasing labour supply. The Quebec model has seen the labour participation rate of prime age women rise to 87% from 74% over the past 20 years, the highest employment of prime age women in the country. Despite this, however, some skeptics argue that the resulting tax revenues from the increased maternal labour-force participation fails to offset the full cost of Quebec’s program. 

Although COVID-19 has exacerbated Canada’s excessive consumption spending, the issue existed prior as well.Amounting to 2-3% of Canadian GDP, the country’s current account deficit runs approximately $50-60 billion per year. Without the proper investments to increase economic growth, Canadian debt will be harder to pay off. Even before the COVID-19 crisis, Canada was struggling to create growth. While Canada’s 25% increase in the level of domestic non-residential real estate investment from 2009 to 2019 sounds promising, this figure is misleading. This increase in investment primarily took place before 2014 and mainly in the oil and gas sector. Relative to the 2014 level, every Canadian industry has seen a decline in investment since then.

Even after the country emerges from the economic crisis imposed by the pandemic, Canada will still face an uphill battle to bring its budget back into balance. An increased life expectancy and lower population growth rate is expected to continue placing upward pressure on federal finances. A recent Fraser Institute report estimates that 25.6% of Canada’s population is expected to be over the age of 65 by 2068, while the working age share of the population is expected to fall below 60%. The same report also estimates that by 2050, federal debt to GDP could reach as high as 69.9% (the highest ratio recorded since 1948). However, this figure could be drastically higher if interest rates begin to equal or surpass GDP growth, which has historically been the case. The devastating impacts of COVID-19 have revealed how ill-equipped Canada’s long-term care homes are for this mounting issue, making it an issue many expect to see featured in the upcoming Throne Speech.

Ever since Prime Minister Justin Trudeau prorogued Parliament on August 18th, speculation has circulated regarding what the impending Throne Speech will entail for Canada’s social programmes. Childcare, housing, long-term care homes, and a green economy plan are all deserving issues that have a high chance of being featured. Tomorrow’s speech will likely feature hopeful ambitions. However, if the Prime Minister is cognisant of the government’s constraining debt burden, he will likely refrain from putting its money where his mouth is.