Federal Debt is Manageable If GDP Growth Continues Says Poloz

Accelerating Canada’s long-term economic growth by reducing interprovincial trade barriers and introducing programs like universal daycare could be the best way to manage the ballooning federal and provincial government debt said former Central Bank of Canada governor Stephen Poloz.

Speaking at an event hosted by the Ivey Business School of the University of Western Ontario on Wednesday, the former top central bank chief said he would “hardly be upset” about the massive increase in public debt during the pandemic, as long as the economy is growing.

“The main thing is we have really low-interest rates. Debt service today as a share of GDP is about one-fifth of what it was in the mid-1990s when we last had some tension around debt and our fiscal situation here in Canada,” Mr. Poloz told the virtual audience.

“What that means is if economic growth is faster than the rate of interest, then the base you’re taxing keeps growing faster than your interest payments, and gradually your debt declines as a share of GDP and your ability to finance it.”

Poloz likened the situation to the aftermath of World War II, saying that very few people who grew up in the 1950s and 60s remember that the government struggled with terrible debt.

He made two policy recommendations to improve growth: introducing a universal daycare program, similar to that in Quebec, to the rest of the country – to increase women’s participation in the workforce – and cut barriers to interprovincial trade.

First, we need to get through the next few months of the pandemic, he said, warning that they could be grim owing to the surge in COVID-19 infections and strict lockdown measures.

In the medium-term, we’re likely to return to a K-shaped recovery, where much of the economy recovers relatively quickly, while certain industries, such as travel and in-person retail, continue to struggle owing to long-term changes in consumer behaviour, he said.

As for inflation, he predicts “it won’t be long” before inflation returns to the Bank of Canada’s target of 2%.

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