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Prime Minister Justin Trudeau's Liberals were running yearly deficits even before the arrival of COVID-19.Adrian Wyld/The Canadian Press

For almost two years, Justin Trudeau’s Liberal government has responded to the COVID-19 pandemic by spending money at levels never seen in peacetime, to protect workers, businesses and the health-care system.

That spending was necessary. But this year the bill comes due. And it won’t be pretty.

The federal deficit skyrocketed from less than 1 per cent of GDP in fiscal 2018-19, before the pandemic, to 15 per cent in fiscal 2020-21. The consolidated federal and provincial books showed a $326-billion deficit in 2020.

Within the Group of Seven, we have gone from having one of the best debt-to-GDP ratios to middle of the pack: behind Germany, roughly on par with France and Britain, but ahead of the U.S., Italy and Japan.

Outside the G7 our debt-to-GDP ratio lags behind Australia, Brazil, Denmark, Indonesia, Ireland, Latvia, Mexico, New Zealand, Poland, South Africa, Turkey and Vietnam, to name just a few.

It is true that Canada’s net debt-to-GDP ratio, which includes pension plan and other assets, is considerably lower. Nonetheless, the 38-member OECD ranks Canada as its ninth-most indebted country.

The days of Canada being a global leader in fiscal responsibility are over. We are up to our neck in debt.

Much of that debt is pandemic-related, but not all of it. The Liberals were running yearly deficits even before the arrival of COVID-19. In the midst of the crisis, they chose to launch a new, national child-care program that will add $8-billion a year to federal expenses. Ottawa has also set aside $40-billion to settle a class-action lawsuit related to First Nations child welfare.

No one questions whether these new programs and settlements are worthwhile. But we must start questioning the costs involved, because the interest on the debt is about to increase.

Faced with persistent and unexpectedly high levels of inflation – currently running at nearly 5 per cent, the highest in 30 years – the Bank of Canada is expected to start raising interest rates as early as this week. That will make it more expensive for governments to service their debt, even as higher interest rates slow economic growth, reducing potential tax revenues.

Since the federal and provincial governments now have such a high level of debt, this will force spending cuts or tax hikes to keep that debt from getting worse.

The federal government faces other challenges that could weaken its fiscal position. Relations with the United States remain almost as fraught under Democratic President Joe Biden as they were under Republican president Donald Trump. Canada has failed to secure exemption from planned American financial penalties on electric vehicles built outside the United States, which could seriously undermine this country’s auto sector. The Michigan government is threatening to shut down a vital oil pipeline into Southern Ontario. All of this could impair growth in the years ahead.

And although this government makes a huge fuss about efforts to fight global warming, emissions continue to increase. The government’s ambitious goals of reducing emissions by at least 40 per cent below 2005 levels within eight years is bound to produce economic pain.

The Liberals confront these major challenges with a weakened political brand. The party squeaked through the 2021 federal election with 32.6 per cent of the vote, the lowest level of support for any federal political party that formed a government. The Grits have lost the popular vote in five of the last six federal elections.

Mr. Trudeau is unpopular. In most months since September, 2017, more people have disapproved of his performance than have approved it.

This is not to say the Conservatives would have done better had they been in charge. Deficits would probably be lower, but there would be no national child-care program or serious efforts at Indigenous reconciliation. There is no reason to believe relations with the United States would be better had the Tories been in charge, and the record on combatting climate change would almost certainly be worse.

This Liberal government has done the best it could in difficult times. But more difficult times lie ahead. We’ll see whether they’re up to it.

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