The Department of Finance expects public debt charges will actually decline from 1.1% to 0.9% of GDP even as the extent of debt rises. And yet, thanks to a simultaneous drop in interest rates, the cost of debt has not risen at all. This ushered in a period of fiscal austerity and painful spending pullbacks.įast-forward almost 20 years and Canada’s federal debt is now on trend to hit nearly 50% of GDP with additional spending certainly capable of pushing the figure much closer to its mid-1990s peak. Canada experienced the painful lessons of high government debt in the mid-1990s, when total federal net debt to GDP rose to 67% and debt servicing costs took up over 35% of revenues. These concerns are not just theoretical in nature.
Economists generally fear that higher debt levels will eventually be subject to a sharp rise in debt servicing costs, limiting a government’s ability to spend and therefore restraining future growth. Just as households and businesses have to pay regular interest payments on their borrowed debt, so, too, does the government.Īnd, also like households and businesses, it is the debt servicing costs - like mortgage payments - as opposed to the total level of debt that eats into spending. When the government spends beyond its revenue, it must borrow from domestic or foreign investors by issuing bonds. Just as households and businesses have to pay regular interest payments on their borrowed debt, so, too, does the government. But as the economy has shown green shoots of recovery, the conversation has quickly - too quickly - pivoted in some quarters to the dangers of rapidly rising government debt. The COVID-19 recession has ushered in near-historic levels of government spending, in Canada and abroad.
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