Canada - Budget and National Debt

A government's budget and debt determine how much it is able to use monetary policy to influence the economy and fund initiatives. If a government has high debt, it will find it much harder to borrow money to finance new projects and justify such spending and vice versa.

Figure 1: Canada's budget balance as a percentage of GDP

Canada's budget was at a relatively healthy level prior to the COVID pandemic, increasing steadily year on year from a budget deficit of -0.45% in 2016 to a budget surplus of 0.54% in 2019. This is an extremely healthy level for the government budget to be in, putting the Canadian government in a good position to create new initiatives and borrow money if needed in a crisis.

Conveniently, such a crisis came along in the form of COVID, pushing the Canadian economy into a recession, with the nation's unemployment spiking to 13.5%. Social distancing rules restricted economic activity and many companies considered mass layoffs of workers.

In response to the pandemic, Canada has created large spending programs to both instigate economic activity and work toward the government's other goals, including transitioning to greener energy, improving education and increasing vaccine production. Transfer payments to households in need have also increased by over 100 billion CAD$ from 2019 to 2020. Businesses also received over 80 billion CAD$ in wage subsidies in 2020. This spending has put a massive imbalance in Canada's national budget, creating a deficit of over 10% relative to GDP in less than a year. Although the Canadian budget is projected to recover by as soon as 2024-2025, this can only be achieved through spending cuts over the next few years, which would stifle and perhaps impend several of the newly created projects and reduce the government's ability to survive another downturn, should one come.

Figure 2: Canada's national debt (Billion CAD$)

Canada's national debt has been on an upward trend over the previous few years under the Trudeau government, with the smallest increase being between 2014-2015 of just under 3 billion CAD$. The COVID pandemic and resultant government spending caused an increase of just over 35 billion CAD$ in 2020 alone, with surely more to come in 2021 as the minister of finance created large spending programs to "kill the recession". These large spending plans have been predicted to push the government debt to over 1 trillion CAD$ by 2022, representing 51.2% of GDP. It remains to be seen how the Canadian government will deal with these mounting debts: attempting to pay them off too soon would cut necessary funding sustaining other government ventures generating much needed economic activity, but clearly these increases are not sustainable in the long run either.