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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.