MNI INTERVIEW: Canada Debt Past 85% of GDP Affordable-Deloitte

Bond investors won't abandon Canada even with overall government debt reaching 85% of GDP this year, and the real challenge is whether Prime Minister Justin Trudeau spends wisely to boost long-term growth hurt by lagging investment, Deloitte chief economist Craig Alexander told MNI.

Canada had a long track record of fiscal discipline before the pandemic and has already started to scale back relief checks as more people are able to safely return to work, said Alexander, who often testifies to Parliament about economic policy.

While the federal deficit swelled to a record CAD343 billion or beyond 15% of GDP, on top of jumbo provincial government deficits, more consistent government payouts leave Canadian households in better shape to spend in the near-term than in the U.S., he said. Canada's fiscal relief is also taking the proper lead in policy response over another major expansion of QE from the central bank, he said.

"The federal government could still run larger deficits than they are today, and not reach a point where the credit rating agencies would become deeply concerned," Alexander said. "In the mid-90s, they had a higher debt to GDP ratio but they were also paying 9.5% on a 10-year government of Canada bond, and today they are paying 60 basis points, and so the cost of borrowing means the government could go even farther than it has in the past before encountering a fiscal crisis."

STRONGER GROWTH NEEDED

Canada's combined federal-provincial debt ratio will rise to 85% from 64%, yet "other governments are in the same predicament," around the world, he said. Fitch stripped Canada's triple-A credit rating earlier this year, while DBRS on affirmed a stable AAA rating Tuesday. That move came just before Wednesday's "Throne Speech" where Trudeau is expected to outline priority spending plans through the restart that may also include environmental and social welfare policies.

"Governments should be very careful about how much they allow deficits to expand from current levels outside of the health risks," he said. "If governments are going to pay down the debt that they accumulate here, we are going to need significantly stronger growth than we were set up for pre-Covid." That means spending more on things like digital infrastructure, and other policies to boost private investment that has been chronically weak, Alexander said.

Canada's economy will shrink 5.8% this year and expand 6.4% next year, according to a new forecast paper Alexander is publishing Wednesday. Unemployment will fall to 7.4% from 9.6% and inflation will quicken to 2.1% from 0.8%.

"I don't think we will see a return to the broad-based lockdowns we saw in March," he said. "If there is a lockdown, I think it will be very surgical this time around, in specific industries where the health risks are high."