New Report Sounds the Alarm on Rising Federal Debt as Ottawa Seeks Economic Growth – .

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New Report Sounds the Alarm on Rising Federal Debt as Ottawa Seeks Economic Growth – .


According to CD Howe’s baseline scenario, Ottawa’s debt-to-GDP ratio will rise to 60% by 2055, about 10% higher than today

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OTTAWA – The latest federal spending madness highlights the “sensitive and fragile” financial situation in Canada, where even a slight slowdown in economic growth could push up debt levels, a new report warns.

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A new forecast by Alexandre Laurin and Don Drummond of the CD Howe Institute, released Thursday, presents the Liberals’ 2021 budget as a risky bet for future economic growth, where debt levels as a percentage of GDP are expected to continue to rise .

According to CD Howe’s baseline scenario, Ottawa’s debt-to-GDP ratio will rise to 60% by 2055, about 10% higher than today. That’s higher than the government’s own estimates, which, even in its most pessimistic outlook, sees the debt-to-GDP ratio drop to around 40% over the same period.

The divergent views point to an ongoing debate over the sustainability of Canada’s national finances, where some observers have said Ottawa can easily absorb its ambitious spending plans, while others say it is needlessly endangering the economy. Canada’s fiscal stability. Finance Minister Chrystia Freeland justified her spending measures by arguing that economic growth in the coming years could effectively cover budget deficits, while failing to introduce tens of billions of new spending would reduce potential growth.

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Ottawa recorded a deficit of $ 354 billion in 2020-21 and is expected to post a deficit of $ 154 billion next year.

But CD Howe’s report suggests Ottawa’s spending plans have been overly optimistic, easily thwarted even by a small gap in interest rates, economic growth, or productivity levels. An increase in deficits between provinces has also added to a growing tax burden across the country.

“It’s a roll of the dice,” said Drummond, an author of the report who has held several senior positions in the Department of Finance during his 23-year career. “It kind of boils down to which philosophy: do you think history is repeating itself, or that this time is different? “

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Supporters of larger spending measures, for their part, said concerns about deficits amounted to an outdated outlook on domestic finances that placed too much emphasis on interest rates in a slow-growing global economy.

The current trajectory set by Ottawa, said Drummond, demonstrates how the current government has sought risky, taxpayer-funded policies to spur growth rather than act as a “custodian of finances and the economy” to long term.

“Yes, it’s good to try to profit from the rise, but you have a responsibility to protect people from the decline,” he said. “And we are not protecting against the decline. “

Projections of future debt levels and prospects for economic growth vary widely.

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CD Howe’s report contrasts with recent findings by the Parliamentary Budget Officer, for example, which assume stronger economic growth and see net debt levels decline until 2038.

Do you believe that history is repeating itself, or that this time is different?

But those estimates, Drummond argues, failed to properly account for falling productivity rates, as well as future economic shocks, be they financial collapses, health crises, or natural disasters. Productivity is of particular concern, despite major technological advances, and declining productivity levels in recent years may turn out to be a more permanent trend than some analysts realize.

Ottawa’s current projections are based on Canada’s average productivity growth since the 1970s, which could provide a skewed outlook for future growth, he said.

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“If we could for a moment take a leap forward 20 or 30 years, I think just as now we see very clearly that Canada moved to a permanently lower productivity rate in the 1970s, we will find that we we went down again around 2000, and it won’t come back, ”he said. “So we’re building up these fiscal pressures, and I don’t believe for a moment that we’re not going to have major shocks to the economy. “

Added to these pressures are the growing tax burdens accumulated by provincial and territorial governments, which have skyrocketed amid the COVID-19 pandemic and rising health care costs. Canada’s cumulative debt-to-GDP ratio, combining federal and provincial debt, will rise to 140% by 2055, according to the report.

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Longer-term projections that are more favorable for the Canadian economy, including those used by the federal government, tend to assume that GDP growth will exceed interest rates by 1%, allowing governments to spend about $ 12 billion. dollars a year more than their income while paying off debt.

Economists almost unanimously backed the temporary spending measures introduced by the Liberal government that extended financial assistance to people and businesses during COVID-19 shutdowns.

But as those spending measures are expected to drop sharply, Ottawa has introduced tens of billions of proposed new spending on more permanent social measures, including a national child care program and expanded EI, among others.

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This in turn will extend the time frame within which Canada can restore its debt-to-GDP ratio to pre-pandemic levels, which could make it more difficult to manage future shocks, Drummond said. The government’s flippant attitude toward the longer return to pre-pandemic levels, the report said, was evident in its decision to display the debt-to-GDP ratio over an extended period.

“Perhaps the goal has been to generate some comfort that the debt burden before the pandemic can be restored,” the report said. “However, this is not achieved until 2055, in 34 years. “

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