With government debts soaring due to efforts to cushion the economic disruption caused by Covid-19, Don Drummond, former chief economist at TD Bank, warns that the government must be prepared to tighten the purse strings in the years ahead.
In a paper published by the C.D. Howe Institute, Drummond, who’s now a senior fellow at the Toronto-based think-tank, sets out four possible scenarios for federal deficits and debt over the next 10 years, and argues for fiscal restraint to return government finances to a more sustainable situation.
“The cost of dealing with Covid-19 will be passed forward to future generations if the debt burden were to remain at today’s pandemic-bloated level,” Drummond said.
Limiting future debt accumulation will require governments to curb their ambitions.
For instance, Drummond said that plotting a return to the government’s pre-pandemic fiscal position and a 30% debt-to-GDP ratio is “incompatible” with the plans laid out in the government’s latest throne speech “and would involve sacrifice.”
“But rejection of getting there even by 2035-36 is tantamount to a decision to pass part of the cost of addressing Covid-19 to a future generation,” Drummond warned.
In the alternative scenarios, where the government allows for even higher annual deficits, the debt burden would soar — pushing the cost onto future generations.
“The billions of dollars of pandemic-induced debt incurred during 2020 and 2021 would be passed to future generations, and debt servicing costs would climb,” the paper said.
Ultimately, restoring fiscal stability will require restraint — some combination of reduced spending or higher taxes — once the pandemic subsides, the paper argued.
“The next generation may be hard pressed to handle a large stock of inherited debt,” said Drummond.
The fiscal challenge sparked by the pandemic also highlights the need for a national debate about the country’s economic future, the paper suggested.
“Before the pandemic Canada was not well positioned to embark upon an era of very strong government spending increases. It is even more constrained now by the longer-term borrowing costs associated with paying for pandemic-related spending,” the paper said.
“The Canadian public must be more engaged in discussion of the challenges and choices that lie before the country,” the paper said, adding that the government must provide more economic and fiscal information to inform these discussions.