To save the economy and support millions of Canadians without work, Ottawa and the provinces are borrowing money on a scale not seen since the Second World War.
In early April, the International Monetary Fund estimated that Canada’s governments will ring up deficits this year worth nearly 12 per cent of gross domestic product. That’s more than $250-billion, or at least 10 times last year’s combined federal-provincial deficits.
And that may understate the pandemic’s final cost. It doesn’t include such things as the federal commercial rent subsidy program announced last week. It makes no provision for Ottawa sending additional financial aid to provinces and cities. It doesn’t include the likelihood of major new spending being needed for testing and tracing.
And the bills may grow if the battle against the virus, and the economic fallout, last longer than expected.
Borrowing a quarter trillion dollars, and counting, buys the tools to fight COVID-19, while paying for the income supports that are the antidote to a downturn on the scale of the Great Depression.
The spending is necessary, but the sheer size of it may be giving you a lump in your throat. You may be asking, “How will we ever pay off all of that debt?”
The answer: We won’t. If all goes according to plan, Ottawa will not pay down the national debt. Not by a cent. Ever.
Instead, the country’s long-term fiscal game plan is likely to look like the one that financed the Second World War. To defeat Germany and Japan, Canada put more than a million men and women into uniform and built what by the end of the conflict was the world’s fourth-largest air force and navy. To pay for it, Canada borrowed as never before or since.
Between 1942 and 1945, the annual federal deficit averaged 21 per cent of GDP, or about 30 times Ottawa’s 2018-19 deficit of $14-billion. The net national debt grew to well more than 100 per cent of GDP.
A lot of people imagine that if a country runs a deficit one year, it must then run an equivalent surplus in the following years, to “pay off” the debt. That’s what might happen with a regular person who takes on a big debt.
But national finance isn’t household finance. A person’s lifespan is constrained, as is their capacity for income growth; a country is a very different creature.
In the 30 years after the war, Canada did not pay off the national debt. It even added to it. Between 1946 and 1976, Ottawa rarely recorded an annual surplus. Instead, the norm was relatively small deficits. Federal net debt actually tripled in dollar terms, from $13.4-billion to more than $41.5-billion.
Yet the weight of that debt steadily fell. By 1976, the net debt-to-GDP ratio had dropped from more than 100 per cent of GDP to a fifth of that. The debt went from being bigger than the economy to the economy being five times its size.
The reason was economic growth. The debt was large and growing, but the economy grew slightly faster. That’s how Canada got rid of its war debt without literally paying it off.
One advantage modern Canada has over 1940s Canada is that borrowing costs, low then, are at record lows now. The yield on the 10-year Canada bond is 0.6 per cent. An extra $250-billion of debt comes with a mere $1.5-billion a year in interest payments. That’s a rounding error when set against the last federal budget’s $356-billion in expenditures.
There are some caveats to this otherwise rosy story.
Even if Canada gets everything right in terms of virus fighting, our ability to come out of the recession quickly, and to enjoy steady economic growth in the decades to come, depends in part on the success and prosperity of others. As an exporting country, the future is not entirely in our hands.
And while Ottawa has enormous borrowing capacity, and will likely never need to pay down a cent of its debts, the same is not true of all provinces.
Growing provinces, led by British Columbia, may be in a position to follow the federal road map. Provinces with big debts and poor growth prospects, notably Newfoundland and Labrador, are not.
All of which recommends that Ottawa do most of the borrowing.
At no time in history has Canada been able to borrow so much for so little. Which is fortunate, because at no time since the last war has Canada needed to borrow so much, so quickly.