This article was published in the Globe and Mail on Dec. 16th, 2024

Monday’s fall economic statement put the federal deficit for the last fiscal year at $61.9-billion. As a result, the federal government did not meet one of its fiscal guardrails.

So what? Why are so many people up in arms that the government has crossed an arbitrary line in the sand? Canada’s fiscal situation is good, and the real question is whether the extra spending that led to this trespass was worthwhile.

The answer to this, sadly, is not a clear “yes,” and this is what we should be upset about, not the deficit or the debt.

Even with the larger deficit for last year, Canada’s net debt-to-GDP (of all levels of government) is among the lowest in the world. Some pundits will counterargue this claim by pointing to Canada’s gross debt, which is relatively high at more than $2-trillion, or by saying the Canada Pension Plan assets should not be included in the tally.

But think of it like this. Someone with a $700,000 mortgage (gross debt) but also with a house and financial assets worth more than $2-million is better off than someone with a $400,000 mortgage but with assets valued at $300,000. The net debt measure (gross debt minus assets) is definitely a better representation of someone’s financial health.

Populations are aging fast, and most countries do not recognize that the associated increase in pension payments represents a future fiscal burden. However, Canada does. Our government raised contributions and borrowed money (increasing its gross debt) and invested the money (leaving net debt unchanged) so the returns on these investments will pay the pensions of future retirees. The government cannot use this money to cover its current spending, but because it will not have to raise taxes in the future to cover the shortfall in pension assets, it is in better financial health.

So, Canada is among the “cleanest dirty shirts.” But how long can we continue ramping up our debt with impunity?

There are all kinds of existing and proposed fiscal thresholds: a certain level of deficit or debt as a per cent of GDP (such as in the Maastricht Treaty); a certain level of interest cost as a share of revenue (as proposed by David Dodge); and many others. But all these thresholds are purely arbitrary numbers. While there has been empirical work trying to ground them, results were not robust to the choice of the data sample.

Ultimately, the quantity of Canadian-dollar-denominated assets (from both private and public sectors) that foreigners are willing to hold is the limiting factor. Japan can have a 200-per-cent-of-GDP public debt without issue because the debt is mostly held by Japanese citizens, whose savings are sufficient to carry this debt and more.

The U.S. can have huge public and foreign debt as foreigners are willing to hold large amounts of assets denominated in U.S. dollars because it is the international currency. This is why Donald Trump was upset at countries wanting to back an alternative to the greenback as the world’s currency.

Canada has a lot of room before reaching this ultimate limit, but we want to stay as far away as possible from it as things could get really ugly. Practically, the appropriate levels of deficit and debt should depend on things like the economic situation, the tax room available, but especially what we borrow the money for.

This last point cannot be emphasized enough. If we were to find the magic solution to our productivity problem and a measure that will boost it with certainty by 1 per cent a year permanently, we should certainly implement it even if it costs $60-billion and significantly increases our debt. Similarly, cutting the debt or the deficit may or may not be a good thing depending on what programs are cut or what taxes are raised.

The deciding goalpost should be whether the new spending or tax cuts will improve future generations’ quality of life. But convincing politicians that some of their great ideas do not meet that goalpost is difficult. Blaming a fictitious fiscal limit for their refusal is easier.

Does the fall economic statement meet that goalpost? Ramping up our debt to pay for temporary GST cuts or business subsidies is not great. Failure to cut inefficient programs is not good. Recording losses because of poor program governance is not great either. But some measures, like those changing the corporate tax parameters, are more defendable, especially since their long-term debt impact is limited. So, the answer is a partial meet.