Front Burner - Canada’s debt is growing. How bad is it?

Episode Date: November 24, 2023

On Tuesday, the federal government’s fall economic statement was overshadowed by this year’s deficit and Ottawa’s skyrocketing debt. How did it get so bad? What does it mean for Canadians? And what’s the economic outlook in a climate of uncertainty? Armine Yalnizyan, an economist and the Atkinson Fellow On The Future Of Workers, breaks it all down. For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts Transcripts of each episode will be made available by the next workday.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Damon Fairless. Our economic plan is focused on building an economy that works for everyone, with good jobs that people can count on. On Tuesday, Deputy Prime Minister Chrystia Freeland delivered her fall economic statement. On Tuesday, Deputy Prime Minister Chrystia Freeland delivered her fall economic statement.

And in it, she emphasized what the Liberal government plans to do to tackle the country's biggest challenges. You see $100 billion for investment directly in affordable housing. You see additional support for co-ops. But the plan for relatively modest spending, $21 billion over six years, was overshadowed by this year's deficit and Ottawa's skyrocketing debt. In the next five years, deficits will go up an additional $20 billion. And while the finance ministry is forecasting that deficits will decrease, there's no path back to fiscal balance. The interest costs now are way over what they projected, again, just seven months ago. Next year's interest costs are going to be $52 billion.

That's twice what we spend on national defense, which, by the way, we're not increasing. Paying off its debts now costs Canada more than double what it did in the early pandemic, going from $20 billion to $46.5 billion per year. Meanwhile, Canadians are struggling with the cost of living and looking to the government for relief. Armin Jelnizian is an economist and the Atkinson Fellow on the future of workers.

She's here to explain how the debt grew so much, what fiscal responsibility looks like in an affordability crisis, and what it all means for Canadians. Hey, Armin, thanks so much for coming on FrontBurner. It's my pleasure. Okay, so let's start off looking at some numbers. The Trudeau government has more than $1.21 trillion of debt, and then paying the interest on that debt will cost something like $46.5 billion. Those are big enough numbers that I have trouble really comprehending them.

So I guess I'm just wondering, what does that mean for the government to be spending so much on interest alone? It's such a good question because the numbers are kind of eye-watering, aren't they? But don't be afraid. That $46.5 billion is a very large amount of money to be paying to service the debt, but it's 10 cents on the dollar taken in. And it's roughly the amount we were paying just before the global financial crisis. And then after that, you know, the Bank of Canada and central banks everywhere made money free, dropped interest rates. And so we have been paying less recently until the pandemic. But what we are paying now is unbelievably less than we were spending in the 80s and the 90s and the

early 2000s. We can go a little bit nuts about this, but we're actually in pretty good shape. And in fact, compared to every other G7 country, we've got the lowest deficit and the lowest debt to GDP among the G7 countries. So we're actually sitting pretty. I mean, I trust you because you're an economist and I'm not. But I guess like for perspective, it seems awfully bad. Like just, you know, it's something like almost twice what we'll spend on the armed forces next year, more than double what the employment insurance program will cost this year, something like $20 billion less than the Canada Child Benefit Policy. So that seems bad, but no? No, because we did something remarkable during the pandemic.

We actually had the government take on debt so that you wouldn't take on debt. And it kept the provinces whole. And it caused our economy to bounce back over a year earlier than in the US, which the US is in a truly terrifying debt and deficit situation. We're not happy campers, but we're much happier than anybody else, including the rest of the G7. So, I mean, there's still going to be knock-on effects to this. Even if we are sitting pretty in comparison to other G7 countries, we're still going to have effects of this. So I guess I'm just wondering, folks like you and I, how are we going to feel it? Oh, you and I are going to feel it in many, many different ways. And one of them is this kind of la-la-la, I can't hear you of the fall economic statement, when we have been dealing with a year and a half of accelerating

concerns about the affordability of basics like housing. This year, we have seen despite the furor that has emerged in the wake of the inflation crisis on the lack of affordable housing, in the wake of the inflation crisis on the lack of affordable housing, there was the sound of crickets. The debt being there and us keeping our AAA credit rating, which is the best you can have in the world, which permits us to issue more debt and have people want to buy it, that fear is keeping these fall economic statements in check. And the main message of these statements right now is we are fiscally responsible. And so that means that your needs are going to be overlooked if you need better health care, you need better housing, you need better anything. You know, talk to the hand.

I want to get into how the government's going to cut back on some of the spending with some of the measures they introduced yesterday. But before that, you kind of alluded to it, but I want to go back to it. How did the debt get so high? Like, is this a consequence of the pandemic? 100 percent. The reason the debt spiked was because of the pandemic. And the government was doing several things. It was trying to keep provinces whole because provincial debt was starting to get out of control. trying to keep provinces whole because provincial debt was starting to get out of control. So it transferred a lot of money to the provinces to keep health and education in particular going.

And then it wanted to keep businesses whole by introducing the Canadian emergency wage subsidy, keeping people on payroll rather than letting them go. And then the third thing that the Canadian government did that no other government did was CERB, the Canadian Emergency Response Benefit. And that kept people whole in their households. And so that meant that when the pandemic restrictions were lifted, more people could buy, more people could participate, and more people had jobs than in a country like the United States. So that series of measures to keep the provinces whole, to keep businesses whole, and to keep individuals whole actually paid off in spades in terms of very

rapid economic bounce back. In fact, Canada had the most rapid economic growth of the G7 in 2022. And this year, it is projected to be amongst one of the fastest growers. So these are all like really good things, good reasons to take on debt to actually increase resilience. But there are always bad reasons to take on debt too. And that's what we're hearing about the most. In this particular case, the spike up in Canadian federal debt was for all the right reasons. And frankly, they are doing what they did last year this time too, and saying, we're actually going to reduce that deficit. We're going to cut it in half over the next five years because our economy is growing. We're not going to do a lot of program

spending cutting, which is great news, but the flip side of that is it's probably not going to grow as quickly as we need it to grow to meet outstanding needs for housing in particular, but also health care. So the economic statement, the fall economic update, Christopher Freeland had announced some spending as well as scrapping GST and HST on the cost of psychotherapy and counseling, some measures to discourage short-term rentals like Airbnb, some other housing measures. We are unlocking billions of dollars in new financing, money that will go towards supporting

the construction of new homes for Canadians. And it's about $20.8 billion over the next six years. So that's less than the Liberals have spent before. But it is coming at a time when folks are struggling with the cost of living and high interest rates and this general pressure that people are feeling. So I guess what I want to know is how does the government square that circle of paying off debt while also helping people out? It's a bit of a hard needle to thread, I think. Oh, I couldn't agree with you more, and I wouldn't want to be in the driver's seat right now. You have indicated what they added to the spending over the next six years and $20 billion over six years on a budget that every year is half a trillion dollars is chump change. I know it sounds like a big number, but it's really a rounding error over six years. but it's really a rounding error over six years. It was expected that they would show spending restraint, but it was expected that they would actually respond a little bit to the emergency in housing that has emerged. But they didn't. And one of the reasons they didn't is because

the fall economic statement for the last two years has become like the one of the one-two punch of economic statement, then budget. So whatever they're going to do, they're going to do in the spring. They're being kind of squeezed on the left by the NDP with whom they have a pact to do more. And on the right, the conservatives who are eating their lunch politically to do less. So they have to find a political, an economic, and a fiscal response at this moment. And spending more just wasn't in the cards for this one, apparently. Surprised me a little bit, but frankly, I can see where the pressures are coming from for them to pick this lane. books of what the federal government does, it spends almost half a trillion dollars this year and next, right? About $500 billion. And a bunch of that money, they have no control over. So there are transfers to individuals that are statutory. They are in legislation. You have the right to receive these payments if you meet certain demographic tests, whether you have

children, whether you're old, whether you're old and poor, whether you're young and poor, you get certain income supports. They have no control over that unless they change the legislation and changing the legislation will trigger a firestorm. So by and large, they're not going to change that legislation. The second area where they have very little control are prescribed transfers to provinces, which again are enacted in legislation. And they are long-term agreements that are multi-year. So again, changing that would provoke a firestorm and they're not going to do it. The third area that they have very little control over is when you run up a debt, you run up your debt charges. The third area that they have very little control over is when

you run up a debt, you run up your debt charges. And so they don't have control over the debt charges. In fact, they have less control over rising debt charges than almost any other area, because the central bank is fighting inflation by raising interest rates. That raises the cost of servicing the debt for everyone, including the federal government. The only area they have any scope to constrain is direct spending. And that includes things like, I don't know, housing and, for example, school food program, which is supposed to be in the mandate letters. Things that they can do directly is the area that they can trim. And that's what they have done. If you look at the books, they're actually reducing the share of the budget that goes to direct spending, increasing the share of the federal budget that goes to provinces and individuals.

And that's the way they're going to reduce the deficit going forward. But my concern is, this is exactly when we need them to step up. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share

with you. Did you know that of the people I speak to, 50% of them do not know their own household income. That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. Just going back to what the government is doing then. So we saw Ottawa cut GST and HST from new rental builds in September. So those moved this all out of support. Jennifer Kiesmaat is on the National Task Force on Housing and Climate and says she's hopeful that this new initiative will help get shovels into the ground.

That's the power of a good incentive. A good incentive delivers a public good. And at this moment in time, purpose-built rental housing is a critical public good that we need. Are there other things that they could be doing now that would improve affordability without increasing debt? There's very little they can do without spending. So cutting GST is, of course, a loss of revenue for them, and we are in a revenue challenge. It's helpful to getting more stuff built, but that stuff had to be built anyway. A tax break is different than a funding incentive, different orders of magnitude.

But, you know, anything is welcome right now. They actually should have cut the GST, purpose-built rental housing, last year. In the fall economic statement last year, it was just like, why aren't you doing this? This is so obvious that you need to do this. But better late than never, I guess. Okay. So I want to zoom out a bit. We've talked to you before about the Bank of Canada strategy to rely on interest rates to temper inflation. But we know that Canadians are feeling these higher rates. The government obviously is, as we talked about. I guess I'm curious, who's making money here? Who's profiting from this? Well, of course, the banks are profiting,

which is why the federal government put an excess profit tax in place in 2022. Also, anybody that had savings that can invest now that weren't in locked in investments can benefit from higher returns. So those are the two groups. And so on that note, looking ahead over the next few years with things the way they are economically, who's set to suffer the most? Without question, the people that are going to suffer the most are the people that always suffer the most. The people with low incomes, the people that renewing their mortgages and meeting the new mortgage payments, more people will end up in the rental market. The rental market, which is already undersupplied, is swelling with new demand. And that is pushing people

who are already badly housed into even worse housing. So right now we are looking at a winter where millions of people are afraid of losing their rental accommodation, losing their roof over their head because there ain't no place cheaper to go to. And it's an extraordinary number of people who are set to renew their mortgage, right, in the next couple of years. Yeah, something like 4 million households will be renewing their mortgages in the next two years. And they're looking at a 48% hike. So that's terrifying for a lot of people who are already, they borrowed to the limit

when money was free to borrow. They probably overextended themselves. So there will be some fire sales out there. So there's interest rate, but then there's also inflation, which has been pinching people. And that has come down, right? So it's just hovering over 3% now. That's down from just over 8% last year. But was that the result of the Bank of Canada interest rates or something else?

Thus far, the drop in inflation has had very little to do with what the Bank of Canada has done. Though, because of the squeeze play in higher costs, including higher rents, you are seeing falling demand. And that was one of the pressures they kept pointing to, that we had a situation of excess demand. Well, the flip side of excess demand is not enough supply. And that was the story of 2022, is we didn't have enough supply. And their point was, if we can cool demand enough to give time for supply to catch up, then we will have cooled inflation. And that's what central bank governor Chuck Macklin has been saying in the last 24, 48 hours. This tightening of monetary policy is working and interest rates may now be restrictive enough to get us back to price stability. By

responding forcefully, we've cooled our overheated economy and taken the steam out of inflation. But until very recently, the thing that drove inflation the most was fuel prices. And that was a direct result of Russia invading Ukraine. So that was one of the major propellants. The second major cause of inflation was food inflation, which continues to track higher than it did before this wave of inflation started. And that's because, again, Russia's invasion of Ukraine affected the world's breadbasket, affected fertilizer exports. So we are still paying the price for that, but it is starting to come down. However,

So, we are still paying the price for that, but it is starting to come down. However, things like climate change, windstorms, hailstorms, droughts, and floods are guaranteed in future to raise the cost of fuel or food by raising interest rates. The things that drive those prices are not in any central bank's control. The one thing they do control is interest rates, and interest rates going up affect housing prices, shelter prices, mortgage costs, and that bleeds over into rental costs. So the irony here is the one tool they have got to fight inflation, raising rates, is making the one budget item that costs people rich and poor, renter and owner more, is causing that line item in your budget to jump up. Can we say that they can take credit for slowing inflation? The jury is out on that. There is a discrepancy of opinion in the economic community. But by and large, the consensus is the drops we have seen in inflation thus far have not been due to the Bank of Canada or any central bank's measures.

And by the way, if the Middle East conflict gets worse, all bets are off as to where inflation is going next. So yeah, so let's talk about that, because we can be optimistic and point to the fact that Canada looks like it will, you know, squeak by without going into a recession. That's something that Christia Freeland pointed out and, you know, stressing. But then there's also a projection for very little economic growth next year. The unemployment rate is expected to go up. And then on top of that, there's some of the stuff you've been touching on. So there's all this global uncertainty.

So what is the outlook here? Are we in trouble? Is there a reason to be optimistic? There's always reason to be optimistic. We are the ninth largest economy on the surface of the planet, with a fraction of the population of the other big economies. And we can do and be anything we want, but we have to do things together. And that's where the test is going to be, is how are we going to come together to meet these challenges? Look, the

things that we're going through here in Canada, any country that had a baby boom in the wake of the Second World War is going through. These demographic changes means we've got more and more people who are seniors living on fixed incomes that are quite low, that need public support, both in terms of income support and healthcare provision. Those costs will go up while revenues go down as a growing share of the population moves into that category. In Canada, it's going to be roughly one in four people. And then the working age cohort, the people that are going to be doing the work and paying the taxes to support all these public services are going to be the smallest working age cohort that we have seen in half a century. That demographic shift offers to countries, economies, societies

on a silver platter, the opportunity to make every job a good job, to actually transform this moment of challenge to a much stronger, more resilient future. But we have to want to do that together. All right. I mean, thank you so much for coming on. I really appreciate it. My pleasure. That's all for today. Frontburner was produced this week by Rafferty Baker, Shannon Higgins,

Joyta Shingupta, Lauren Donley, and Sarah Jackson. Sound designs by Mackenzie Cameron and Will Yar. Music's by Joseph Shabison. Our senior producer is Elaine Hsiao. Our executive producer is Nick McCabe-Locos. And I'm Damon Fairless. Thanks for listening. Frontburner will be back on Monday.

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