Canada's leeway to take on more debt is an accounting fiction

MONTREAL, March 24, 2016 /CNW Telbec/ - In its first budget, the new federal government justifies its imposing deficits using the argument that Canada's net debt is clearly lower than that of the other G7 countries. However, by using gross debt instead of net debt, Canada's debt-to-GDP ratio goes from 38% to 90%, according to a Viewpoint published today by the MEI.

Recall that the deficits announced in the recent budget amount to $29.4 billion for 2016-2017, or $1,631 per net taxpayer, and a total of $113 billion over the next five years.

"Net debt is a measure that subtracts away financial assets," explains Mathieu Bédard, economist at the MEI and author of the publication. "In the case of Canada, the net debt is the debt minus, for example, public service pension plan assets, or liquid assets held by the government in the form of deposits, dollars, and any other tradeable financial assets."

The problem with net debt is that it is basically an accounting fiction. The government, even in a time of crisis, could not rid itself of its financial assets to reimburse its debt since it always needs liquidity for its normal operations and in order to provide for the future retirement of its public employees.

"It is difficult to imagine a government reimbursing its debt with its pension plan reserves or the other financial assets it needs to function from day to day," says Mathieu Bédard.

Also, the government pays interest on the gross debt, not the net debt. According to the most recent budget, gross public debt charges amount to $25.7 billion today, and will rise to $35.5 billion in 2020-2021. These payments will make it difficult to lower taxes and will limit the amount of room the government has to manoeuvre.

"When the gross debt is taken into account, the substantial leeway the federal government claims to have when it compares Canada with other countries does not exist, and therefore does not justify the large deficits to come," concludes Mathieu Bédard.

The Viewpoint entitled "Does Canada Really Have the Leeway to Take on More Debt?" was prepared by Mathieu Bédard, Economist at the MEI. This publication is available on our website.

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SOURCE Montreal Economic Institute



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