Federal debt is manageable with GDP growth, Poloz says

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Boosting Canada’s long-term economic growth by reducing interprovincial trade barriers and introducing programs such as universal daycare may be the best way to manage ballooning federal and provincial government debt, former Bank of Canada governor Stephen Poloz says.

Speaking at an event hosted by the University of Western Ontario’s Ivey Business School on Wednesday, the former top central banker said he would be “hard pressed to get fussed” about the massive increase in public debt that has come during the pandemic as long as the economy is growing.

“The main thing is we have really low interest rates. Debt service today as a share of GDP is about one-fifth of what it was in the mid-1990s, when we last had some tension around debt and our fiscal situation here in Canada,” Mr. Poloz told the virtual audience.

“What that means is if economic growth is faster than the rate of interest, then the base you’re taxing keeps growing faster than your interest payments, and gradually your debt declines as a share of GDP and your ability to finance it.”

Mr. Poloz likened the situation to the aftermath of the Second World War, saying that few people who grew up in the 1950s and 60s recall the government straining under crippling levels of debt.

“Basically, we grew out of it. We never really paid it back per se, what happened is the economy got way bigger, so it didn’t matter in terms of the stock of debt any more,” he said.

He had two policy recommendations for improving growth: introducing a universal daycare program, similar to the one in Quebec, to the rest of the country – which would increase women’s participation in the labour force – and cutting barriers to interprovincial trade.

“Fixing a couple things like that could add 0.4, 0.5 percentage points onto growth every year, and that’s free money we might as well have to help us pay our debt,” he said.

First, we need to get through the next few months of the pandemic, he said, warning that they could be grim owing to the surge in COVID-19 infections and strict lockdown measures.

In the medium-term, we’re likely to return to a K-shaped recovery, where much of the economy recovers relatively quickly, while certain industries, such as travel and in-person retail, continue to struggle owing to long-term changes in consumer behaviour, he said.

“The economy will be on two tracks. You’ll have a fast track and really sluggish track. And when you add it up, it will look like a slow jobless recovery over all, but actually it will be pretty hot in the top part of the K,” he said.

As for inflation, he predicted that “it won’t be that long” before it returns to the Bank of Canada’s target of 2 per cent.

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