There is ongoing discussion about whether rising government debt from the COVID-19 crisis poses a big problem for Canada.
In fact, it’s just the opposite.
Large-scale public spending to support people and invest in the long-term public good is prudent not only on a human level, but also for our long-term economic prosperity. And while the size of government debt compared to our economy (our debt-to-GDP ratio) will rise substantially through this crisis, that’s not something we should to be concerned about.
Consider a few of the reasons we shouldn’t fear this debt.
First, long-term borrowing costs for government are extremely low. As a result, making public investments with even modest social and economic payoffs will leave us wealthier as a society (more than covering borrowing costs) compared to if we don’t make those investments.
Indeed, we have an enormous backlog of highly productive public investments that are badly needed in this country, including in climate action, housing, child care, public transit and tackling poverty. We should invest in these public goods aggressively in the coming months and years, both because they’re important in themselves and to help strengthen our economy.
Second, governments have very long-time horizons over which to manage debts, unlike households. If people are going to make ends meet during the pandemic and in the economic aftermath, the only alternative to incurring public debt ispiling more private debt on already over-leveraged households.
Our permanent institutions of government are much better positioned to bear debt than households, which can only depend on income over a finite number of working years. We know from World War II (when Canada’s debt-to-GDP rose above 100 per cent) that we can emerge from a crisis and successfully manage high levels of government debt gradually while the economy grows.
We live in an incredibly wealthy country today, but also anincredibly unequal one. That extreme inequality is a result of public policy choices and we can make different ones.
To help pay for public investments and to service debts, we also have the option of getting serious about taxing the super-rich. A few of the many policy tools available to us are awealth tax, a wartime-styleexcess profits tax and long overdue measures to crack down ontax havens.
Finally, much of the public debt we are adding today, we actually owe to ourselves. That’s because one of the biggest purchasers of government debt right now is theBank of Canada itself. When we areour own creditors, it opens up possibilities to be flexible on repayment terms and timelines and the choice can always be made to roll over this debt at maturity.
After decades of being told “the cupboard is bare” when it comes to public spending, we’ve now seen a dramatic glimpse of the resources we can marshal when necessary. But expect to soon see efforts to try to stoke fear about public debt and push for cutbacks and “belt-tightening.”
Don’t be fooled. We are rich enough not only to weather this crisis, but also to strengthen our public services and build a fairer and more equal Canada for the long-term.
Alex Hemingway is an economist at the Canadian Centre for Policy Alternatives BC Office.
