Canada may have to cut its debt after the pandemic

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Canada may have to cut its debt after the pandemic

This could be a risky strategy for the country, which piled on new debt at a faster pace than any other of its Group of Seven peers during the pandemic. The high level of indebtedness could limit Canada s ability to manage long-term challenges that require massive government funding like transitioning from fossil fuel-reliant economy to a green one. Please apologize, but this video has failed to load.

Tap here to see other videos from our team. Try refreshing your browser or 'Tax the rich' plan won't help pay Canada's record debt, analysts say A far greater debt-to-GDP ratio post-pandemic means Canada has far less wiggle room to respond to the next crisis, be it economic, trade, climate or health related, analysts say. Essentially, Canada s large debt burden does not leave significant new space to offset major new shocks, said Kelli Bissett-Tom, director of Americas sovereign ratings at rating agency Fitch Ratings.

Fitch has already stripped Canada of a triple-A credit rating, but S&P Global Ratings and Moody's Investor Services still give Canadian debt the highest rating. Ahead of their re-election the Liberals pledged $78 billion in new spending over five years, about four per cent of gross domestic product, partially offset by $25.5 billion in new tax revenues over the same period, mostly targeting tax evasion, wealthy individuals, big banks and insurers. The idea is to tap those who have received the best weather for the pandemic to pay for new spending on everything from mental healthcare to school lunch programs. But these taxes won't help the Canada s record national debt, nor will they be sufficient to balance the budget.

This becomes risky because at some point the cost of carrying this debt will rise and a future government may need to cut services or raise taxes more to address that burden, some economists warn. Nothing related to the cost of the pandemic will be repaid by current generation. And that s very bold and risky, said Don Drummond, the Stauffer/Dunning fellow at Queen's University. Canada is not unique in looking to tax the wealthy to pay for COVID 19 - years of expenses. But countries like the United Kingdom are making an effort to start paying down debt as part of their new tax plan and Western European nations are signalling public debt levels won t rise forever. Canada s gross debt to GDP ratio jumped 36 per cent last year to 118 percent amid massive government transfers of aid to individuals and businesses, by far the largest increase of the G-7 group of wealthy nations.

This ratio, which includes all provincial and federal government debt, is expected to drop in 2022 to 113 per cent, based on projections for economic growth rather than debt repayment. Reducing Canada s debt as a share of the economy over time brings some sort of fiscal discipline, but that fiscal anchor is destined to break during challenging times, economists at BMO Capital Markets said in a post-election note. Canadian businesses who are positive, but face supply shortages for months to come.

If RBC CEO is right about impending spending spree, interest rates will rise sooner than expected Trudeau s Liberals failed to score a majority in the Sept. 20 election and continue to depend on left-leaning New Democrats NDP to pass legislation. That party could push the Liberals to more spending in exchange for their support.

The Liberals have pledged to increase the corporate tax rate for big banks and insurers, as well as introduce an extra payment by those same businesses to help pay for the economic recovery. The government also wants to impose a minimum tax rule for top earners. Trudeau s Liberals will need the support from at least one other party to pass any new legislation like changes to tax laws. The NDP favours tax increases on the rich and the very wealthy. We had a lot of fiscal space, a lot. And we - used a lot of it on the pandemic, Dominique Lapointe, senior economist at Laurentian Bank, said, referring to the government s record stimulus to support the economy. People are confused because we're using this space and continuing to introduce new measures.