Canada in ‘Economic and Fiscal Fog,’ Needs Real Debate on Future Path

October 21, 2020

Don Drummond, former Chief Economist for TD Bank

BRITISH COLUMBIA — Canada needs a national debate over its economic and fiscal future, according to Don Drummond, former chief economist for TD Bank.

In “Canada’s Foggy Economic and Fiscal Future,” Drummond lays out four scenarios for Canada’s fiscal future, each targeting a deficit and debt track into the 2030s, and calls for fiscal restraint.

The pandemic has highlighted and amplified the economic, social and health vulnerability of many Canadians. “We are now at a crossroads,” says Drummond. “We have been locked into a path of mediocre productivity and real income gains for far too long.”

Based on realistic assumptions for GDP growth and interest rates, which effect debt servicing cost, Drummond considers the most effective and efficient approaches to Canada’s economic and fiscal future.

The first scenario outlines a return to pre-pandemic goals and the 30 per cent target for the debt-to-GDP ratio. “Returning to a 30 per cent debt burden would be incompatible with plans referenced in the Speech from the Throne, and would involve sacrifice,” says Drummond. “But rejection of getting there even by 2035-36 is tantamount to a decision to pass part of the cost of addressing COVID-19 to a future generation.”

The second scenario accepts the fiscal hit from the pandemic and returns to a target of $25 billion for annual deficits as of 2022-23. By 2030-31, the debt burden would be 42.8 per cent. “This scenario is the most spend-thrifty that satisfies most of the definitions of a fiscal anchor or fiscal responsibility that are being bandied about,” writes Drummond. “It leaves the debt burden relatively high, but at least brings it down from current, bloated levels.”

The final two scenarios track annual deficits of $50 and $100 billion, revealing a debt burden of 49.5 and 62.9 percent respectively by 2030-31, and violating most prudent fiscal parameters. The billions of dollars of pandemic-induced debt incurred during 2020 and 2021 would be passed to future generations, and debt servicing costs would climb.

Drummond’s scenarios illustrate that restoring and then maintaining fiscal stability calls for some degree of fiscal restraint once the pandemic subsides. “The next generation may be hard pressed to handle a large stock of inherited debt,” says Drummond. “The cost of dealing with COVID-19 will be passed forward to future generations if the debt burden were to remain at today’s pandemic-bloated level.”

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Don Drummond is Senior Fellow at C.D. Howe Institute and Stauffer-Dunning Fellow at  School of Policy Studies, Queen’s University

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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