COVID-19: The Hangover Part 1

With the bevy of Covid-19 stimulus and support programs having been launched over the last 60 days the federal debt is headed to crush the $1 Trillion mark for the first time in history this year!

However, some (MMT’s modern monetary theorists mostly) will say the such deficit levels are by no means unprecedented or anything to worry about, despite the fact that the all time high came at the end of World War II. As an interesting note, total Canadian deaths as the result of WWII was 45,400 (0.37% of the population) while 6,538 Canadian deaths have been attributed to Covid-19 as at the time of writing (0.017% of the population).

The deficit this year is on course to be $252 billion or 12.7% of GDP while in 1943 the deficit accounted for 23% of economic output. Likewise, total debt will be 48% of GDP this year while at the end of WWII it was 109%.

Happy, happy right? Based on historic measures Canada has a ton of dry powder!

Not so fast. Post WWII Canada averaged 5.7% GDP growth through the 1950’s and 1960’s. Over the last 20 years we’ve averaged just 2.2% GDP growth. Little appears on Canada’s economic horizon to lead us to believe that GDP growth in Canada will be anything but anemic going forward over the next couple of decades. Personal productivity over the last 20 years has only been 0.8% – half the rate of the 1960’s and 70’s. Furthermore, based on demographics, the number of working people compared to seniors will fall from 4:1 to 2:1 over the next 40 years (while life expectancy is expected to continue to improve).

Is anyone else having dreams of having their head squeezed like a lemon sometime in the near future or, is it just us?

The hard choice going forward will be between raising taxes and reducing spending. As Finance Minister Paul Martin was quoted as saying with the release of the 1995 deficit slaying budget that took us from a $30 billion deficit in 1995/96 to a $14.3 billion surplus in 1999/2000; “Debt and deficits are not inventions of ideology. They are facts of arithmetic.”

Our greatest concern lies in the fact that ‘arithmetic’ seems to have become irrelevant.