E Canada Has The Fiscal Capacity To Finance The COVID Created Deficit

Canada’s Finance Minister, Bill Morneau, released a long awaited ‘snapshot’ of the federal government support during the economic crisis. The deficit will reach C$343 billion deficit (US$ 255 billion) for this coming year, more than ten times the deficit forecasted in the last budget, pre-COVID-19 pandemic. For the Finance Minster the most important immediate issue is: how does the government finance this deficit and at what cost?

To begin with, Canada started out with lowest net debt/GDP of any of the G7 countries.  Canada in 2020 will record a debt ratio of just under 50%, compared to an average debt ratio for the G7 of 100%.

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Source: IMF and Canada Dept of Finance

This is an extraordinary time for governments to issue debt cheaply. Canadian long-term interest rates are at historic low levels, resulting in overall borrowing costs that will actually fall as percent of GDP. Debt charges are expected to be less than 1% of GDP through 2020-21.

(Click on image to enlarge)

Canadian governments have customarily borrowed mostly in the short-to medium- term bond market. Now, the government is rightly taking advantage of issuing more debt in the 10-year and 30-year market where rates currently sit at 0.7% and 1.0%, respectively. Moreover, the bulk of Canadian long-term debt is in the hands of Canadian institutions such as pension funds, insurance companies and related financial institutions which have regulatory obligations to purchase Canadian government assets. Tapping into the long-term bond serves both the needs of the issuers and borrowers. As the Finance Minister put it:

With this Debt Management Strategy, the government intends to issue a historic level of long-term bonds to manage the significant increase in debt resulting from the response to COVID-19. In light of the unique situation posed by the COVID-19 crisis, the government will continue to review the Debt Management Strategy for opportunities to borrow at longer maturities and lock in historically low interest rates, as well as enhance the predictability of debt servicing costs.

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William K. 1 year ago Member's comment

My big question is "how did the Canadian government get so smart?" when here in the USA our government has chosen to bury us in debt and fuel the fires of inflation.

Danny Straus 1 year ago Member's comment

I think I want to move to Canada now!

Norman Mogil 1 year ago Author's comment

Maybe the answer is that we have a left of centre govt. The US should consider that option in November.

Angry Old Lady 1 year ago Member's comment

Way ahead of you Norman!

Dick Kaplan 1 year ago Member's comment

Agreed. This chart is very telling:


Alpha Stockman 1 year ago Member's comment

I've been very impressed with how Canada has handled all aspects of the COVID-19 crisis.

Norman Mogil 1 year ago Author's comment

I agree. We have closed the border and try to keep ourselves safe. And the population at large is cooperating with the government regarding openings

Dick Kaplan 1 year ago Member's comment

I believe much of the difference comes from a unified message. When a country's medical professionals AND it's leaders show leadership and urge caution, people listen.

The US offer combating views with our leader (#Trump) making fun of those who wear masks, claiming they don't help, and "leads by example" by not wearing one. This confuses people and emboldens the slow witted individuals who still believe #COVID19 is no big deal.

Angry Old Lady 1 year ago Member's comment

You hit the nail on the head. Had Hillary won, I suspect America would have had a much stronger response to the pandemic and there would likely be tens of thousands of fewer dead.

William K. 1 year ago Member's comment

My thinking is that if Hillary Clinton had won the election we would have so many other problems to distract us from the virus pandemic. The USA really needs that additional choice option: "None of the Above." How else to get a better set of candidates?