During the campaign, Trudeau promised us a modest $10 billion deficit to assist in paying for his aggressive infrastructure plan.
In total, Canada currently owes $650 billion in federal debt. We currently pay around $30 billion each year on debt servicing costs. In Trudeau’s first budget it was nearly twice as much as we pay for our military. The cost of our debt is the opportunity cost of what we could be doing with those funds instead of the debt servicing. Imagine what could be accomplished in this country if we had twice the military horsepower working exclusively to improve the lot of ordinary Canadians.
The trouble with debt goes well beyond the opportunity cost; there is a further consideration of what debt servicing costs could be going forward.
In the year of my birth, 1985, interest rates on a mortgage ranged from 15%-20%. When Trudeau was elected in 2015 I bought an investment property that had a mortgage rate of 1.95%. Within my young lifetime, we have had a 700% swing in our interest rates.
Going forward if we suffer the reverse swing our federal treasury could be emptied. We have unprecedented levels of debt in Canada. Our debt-to-GDP ratio, at the time of writing, is at a staggering 98%.
Deficits during a time of rising interest rates are a recipe for disaster. Any economic bubble can be problematic, as we’ve seen with the housing bubble most recently, the Dot Com bubble prior to that, and the monetary collapse of the 1930s.
Artificially low interest rates from the Bank of Canada have given rise to a debt bubble.
When an economy is sluggish, as it was during the 2008 recession, central banks will lower interest rates to encourage borrowing. The borrowed funds are then spent, on new houses for example, which creates jobs for construction workers, bankers, realtors, lawyers.As these people have more work, they spend their money and the economy theoretically should improve. The difficulty is in spending their money.
When five people want to buy a product, a house, for example, the price that is charged is higher because the seller has more options. Inflation will result from low-interest rates. To slow inflation, central banks will raise interest rates.
The key for governments to preserve the economy is to avoid the temptation to borrow simply because costs of borrowing go down. As interest rates rise, these costs will go up and the federal government will be depleted of its funds.
Greece suffered this fate, Japan is undergoing it now. Lebanon has had a government shutdown over it. This is an issue that isn’t commonly understood by a populace until it happens to their country. The lessons of economic history are akin to all of history, those who ignore it are doomed to repeat it. Deficit spending sounds pleasant because of the programs it ushers in; the reality is that it will ravage a country.
Brandon Kirby
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