Canada’s debt, poor economic growth worrisome

Trudeau
Trudeau

Canadians are, by and large, a practical people. We value common sense. That might explain why Prime Minister Justin Trudeau was raked over the coals when he said that the government’s ever increasing deficits and debt is a sign the country is doing just fine, thank you very much.

Now, Trudeau’s observation that the level of debt the country is carrying has a certain logic to it.

After all, the very fact we have this much debt is a sign that people, institutions and other countries have sufficient faith in us that the debt will be repaid.

Common sense, however, tells us that just because people are willing to lend us money does not mean that we can continue borrowing indefinitely. Every dollar borrowed today must be paid back with interest tomorrow. There is simply no getting around that fact.

Harper
Harper

When Trudeau took over from Stephen Harper in 2015, the federal government was budgeting for an approximately $1.5 billion surplus. But that surplus vanished quickly as the newly elected Liberal government went on a spending spree.

As shown in the accompany graph, spending increased exponentially in the four years the Liberals have been in power.

spendingThis level of spending has increased the national debt to levels not seen the recession of the 1990s, as shown in the next graph.

debtThe national debt, as a percentage of GDP, ought to worry any rational person, because it is a clear indication the government is oblivious to what is actually happening in the economy. Government spending is no substitute for real economic growth.

debt-gdpIn the past, Canada has enjoyed strong economic growth. The 60s, 70s were particularly strong and while growth in first decade of the 21st Century was not as strong (three per cent on average), it was still better that the meager two per cent annual growth rate recorded recently.

Worse still, the country now looks as if it is entering a recession which will reduce government revenues and increase expenditures.

The importance of economic growth cannot be overstated. Three per cent annual growth increases per capita GDP by about $45,000 in 20 years.

Unfortunately, the Trudeau government has introduced regulations and taxes that have discouraged investment and consumer spending, thus ensuring that the recession will be both deep and prolonged.

How long will it be before current levels of spending lead to both a currency and liquidity crisis?

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