Canada’s increasing debt? ‘Unwarranted fears’

With the feds shovelling dollars out the door at rates unseen since the Second World War, many are questioning how we're going "to pay for it."

Yet are professional economists worried? The answer is, not really.

Partly this is because of Canada's relatively low debt-to-GDP ratio — the lowest in the G7. It was around 30 per cent going into this year and we're forecasted to end the year closer to 50 per cent. By comparison, the U.S. is over 100 per cent and Japan, the most indebted of the G7, is around 170 per cent.

Back in the mid-1990s, just before Paul Martin's drive for balanced budgets, Canada's debt-to-GDP was 66 per cent. More importantly, though, the government was paying about 10 per cent interest on that debt. Currently, a 10-year government bond pays a scant 0.6 per cent interest.

It's that low interest rate – and the widespread belief that it will stay low for the foreseeable future – that really has economists sleeping well at night. They say that, as long as the interest rate stays below the rate of growth in the economy, our economy will outgrow the cost of the debt.

Indeed, this is what we saw after the Second World War, when Canada's debt-to-GDP stood at 109 per cent. A robust, post-war economy quickly put that debt into the rearview mirror.

A less mainstream group of economists who believe in something called Modern Monetary Theory takes all this even further.

According to one of the leading proponents of MMT, Stephanie Kelton (see her book, "The Deficit Myth"), for a country like Canada, which creates its own currency and can borrow in that currency, debt and deficits are never a problem. Canada can never default on its debt — unlike Greece, which gave up its "monetary sovereignty" to the Euro or Argentina, which borrows in U.S. dollars. The Canadian government can always create the money needed to pay its debts.

Does this give it a free pass to spend as much as it wants? Absolutely not. But according to MMT, looking at deficits and debt is the wrong thing to focus on. Instead, our only limitation should be inflation. If the Bank of Canada were to create too much money, we'd have too many dollars chasing too few goods in the real economy and the value of those dollars would fall — hence, inflation.

But in an economy functioning below full capacity, with many people unemployed, there is perhaps more latitude for governments to run deficits than we commonly believe. More money injected into such an economy – if invested wisely – can spur growth and create more goods and services for that new money to ‘chase,’ thus creating more prosperity, not inflation.

Whoever is right, my personal view is that money is a useful fiction and as such we should use it to benefit everyone as widely as possible and not be hampered by unwarranted fears. This often means learning to think about it differently, but if we can manage that, a world of possibilities that were always there may just open up to us.

Sean Butler is from Rupert, Quebec.