2. Net government debt is flattered by pension plan assets
Nope, said Bartlett, Desormeaux and Khan.
When the assets of the federal and Quebec pension plans are removed, Canada’s central government net debt rises to 35.1 per cent of GDP, second lowest in the G7.
3. We’re back where we were in the 1980s and 1990s
“Not so much,” they said.
General government debt — meaning all levels of government — rose above 1990s levels during the height of the COVID-19 pandemic, to just over 100 per cent of GDP. That was last seen in 1996, said the report, citing International Monetary Fund (IMF) data.
But that number is starting to shrink. “Fortunately, the IMF expects it to keep moving lower, ultimately returning to pre-COVID levels,” the economists said.
Separately, Desjardins defended the federal government’s books, noting that at no time, even during the pandemic, did “any measure” of debt to GDP threaten to breach 1990 levels.
What’s more, in the 1990s, almost 40 cents of every dollar went to debt servicing, whereas today that number is closer to eight cents, although it is expected to rise to nearly 10 cents.
4. Federal debt is unsustainable
“This risk isn’t easily busted,” said the economists, ceding some ground.
The economists noted that Budget 2023 projections for federal finances depend on a few assumptions, among them that GDP and revenue will grow more than program spending and interest rates. But, given Ottawa’s record on spending, it’s tough to make a case for this scenario.
“If history is a guide, there is a risk that federal program expenditures increase materially even as the economy and revenues underperform,” they said.
Also, there’s currently no certainty around the path interest rates will take. The Bank of Canada said last week that it was willing to hike again if inflation persists. Since March 2022, the central bank hiked rates 425 basis points from 0.25 per cent to 4.5 per cent.
5. If you include the provinces, debt looks much worse
“No. Not really,” they said.
The provinces have lower net debt to GDP ratios than the federal government. In fact, most of their debt positions improved following the provincial budget season where many reported improved fiscal outlooks and surpluses.
But, provinces also provide services such as health care that are large budget drains. That coupled with the rising cost of caring for aging populations could add to financial pressures in the future.
6. Governments are running massive deficits
“Wrong again,” said the economists.
The IMF said Canada has among the smallest general government deficits as a per cent of GDP of the G7 countries, and that it expects Canada to lead those countries in keeping deficits “under control.”
Desjardins economists acknowledged that the federal budget forecast a growing deficit. They said that could be mitigated by improved budget balances at the provincial level.
7. The new spending is inflationary
Some is and some isn’t, Desjardins said.
Much of the $43 billion in new federal spending over six years is earmarked for the expansion of the health and dental-care programs and green energy subsidies, “neither of which are likely to stoke short-term inflation.” The grocery rebate Ottawa announced during the budget could be mildly inflationary, the report said.
Overall, economists have concluded that spending at the federal and provincial levels will be inflationary “at the margins,” Desjardins said. Still, consumers have noticed the spending, and now appear to expect inflation will hang at a higher level for longer.
“Fiscal myth making is alive and well in Canada,” Desjardins said. “Some of this stems from past deficit and debt struggles that remain part of our cultural DNA. But many of the statements that are presented as fact have become little more than fiscal fearmongering, at times trumpeted by old generals eager to fight past battles.”
