Keeping Our Fiscal Powder Dry: Why Rising Public Debt Leaves Canada Less Prepared for the Next Crisis - C.D. Howe Institute
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Federal and provincial governments need the fiscal capacity to borrow heavily when major crises occur. Drawing on five premises about public debt, fiscal policy, and public behaviour, this Commentary argues that preserving the necessary fiscal capacity requires reducing debt-to-GDP ratios after crises; otherwise, repeated borrowing from progressively higher debt levels risks undermining investor confidence, raising borrowing costs, and eventually forcing governments into painful tax increases or spending cuts.
Canada’s combined federal-provincial net debt-to-GDP ratio is now roughly 74 percent, placing it in a zone of “fiscal complacency.” This report divides public debt into three illustrative zones: “fiscal prudence” below roughly 67 percent, “fiscal complacency” between roughly 67 and 95 percent, and “forced austerity” above roughly 95 percent. These boundaries are deliberately approximate, but the framework highlights the value of maintaining enough fiscal room to absorb a large future shock without triggering higher borrowing costs.
This article is an excerpt. To read the full content, visit the original source. C.D. Howe Institute
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