America’s massive debt and deficit could cause problems in Canada, according to the sent to Justin Trudeau
The U.S. government’s spiralling debt and deficit levels are likely to be a drag on Canada’s government as well, according to a memo written for the prime minister and obtained by the Star.
The U.S. is set to run a nearly $2-trillion deficit this year and will end the calendar year with more than $28 trillion in debt. Deficit spending is covering nearly 30 per cent of U.S. government expenditures.
The memo — sent by the privy council and signed by Mollie Johnson, deputy secretary to the cabinet — was obtained through the access to information system. It was written for the prime minister in June and warned the U.S. fiscal picture is not solely a problem for the Americans.
“As a relatively small market, with significant dependencies on the U.S., Government of Canada bonds tend to follow movements in the market for U.S. treasuries,” reads the memo, which is heavily redacted.
The Canadian government’s total debt was projected to be $1.2 trillion this year in the spring budget. Finance Minister Chrystia Freeland has yet to provide a fall fiscal update this year or released the public accounts, an annual report that details exactly where Canada’s finances stand.
Canada’s current debt levels have doubled since the pandemic, but they are still nowhere near the levels projected in the U.S.
If the spring numbers still stand, Canada’s debt would be approximately 42 per cent of the country’s GDP. By contrast, the memo notes, U.S. debt is at 97 per cent of GDP and on a path to hit 172 per cent by 2054.
The current record high for U.S. debt was 106 per cent of GDP in 1946, at the end of the Second World War. The memo notes all this new debt is being financed with new U.S. treasury bonds.
These bonds are purchased largely by Americans companies and individual investors, but the more precarious the U.S. government’s finances become, the higher interest the bonds have to offer.
The memo notes that when the interest rates rise on U.S. bonds, Canadian government bonds are also driven up. A rise of one per cent for the American bonds has typically caused a rise for Canada of 0.8 per cent, driving up Canada’s interest costs.
Canada’s debt charges are much lower than the U.S., but they are still expected to cost the government nearly $65 billion a year before the end of the decade.
Kevin Page is currently CEO of the Institute of Fiscal Studies and Democracy at the University of Ottawa and a former senior civil servant, as well as the country’s first parliamentary budget officer.
He said the memo is a smart warning from his former colleagues to the prime minister.
“A very intelligent kind of heads up that we could have some instability coming from the U.S., with respect to its fiscal situation,” he said.
Page said there likely should have been more memos like this in the lead up to the 2008 financial crisis to help warn Canadians of what was coming.
In January, U.S. politicians face a vote on the debt ceiling, where they will have to consider raising the overall amount of money the country can borrow. Typically, these votes are contentious and can lead to market instability.
Page said those votes are significant, but it’s ultimately financial markets that decide on whether to buy U.S. debt and that could lead to a reckoning.
“I think at some point the market’s going to say that you have to deal with this fiscal situation and that could create a moment,” he said.
Several of the major credit ratings agencies have downgraded their assessment of U.S. debt and the memo to the prime minister notes there are growing concerns about America’s abilities to pay its bills long-term.
“Several observers and the International Monetary Fund are of the view that the U.S. government will require tighter fiscal policy to put the public debt on a more sustainable path.”
A non-partisan think tank, the Committee for a Responsible Federal Budget, estimated that President-elect Donald Trump’s proposals would add $7.75 trillion to the federal debt, while Vice-President Kamala Harris’s proposals would have added $3.95 trillion.
Trump has announced a Department of Government Efficiency, headed by Elon Musk and Vivek Ramaswamy, that aims to cut costs, but the pair will be challenged because much of the U.S. government’s spending is on programs that provide retirement benefits and medical insurance to elderly Americans, programs Trump has pledged not to cut.
Page said despite the threat to the U.S. government, it doesn’t seem as though the fiscal situation is part of the discussion.
“It’s hard to be optimistic, just from what we’re hearing, there was no real discussion of fiscal responsibility, in that last campaign in the United States, nobody talked about reducing the deficit.”
This article was first reported by The Star
