The federal government’s growth outlook is overly optimistic, a report from the C.D. Howe Institute says, with even a small change in assumptions leaving Canadians with a massive debt burden.
“We believe the federal budget’s long-term growth assumptions to be optimistic,” authors Alexandre Laurin and Don Drummond wrote in a report released Thursday. “Given the amount of uncertainty over prospects, budget assumptions certainly cannot be ruled out. But in leaning toward the optimistic, they do not provide a solid base for planning; plans based upon overly optimistic assumptions put the country at risk.”
Failing to consider less optimistic scenarios amounts to “rolling the dice on Canada’s future,” they said, particularly in light of the roughly $500-billion debt Ottawa has accumulated during the pandemic.
Laurin and Drummond’s baseline scenario assumptions use lower average GDP growth and higher debt-servicing costs than in the Liberal government’s 2021 federal budget. The government’s favourable scenario is based on average annual nominal GDP growth of 4.1% and the interest rate on government debt gradually rising to 3.3%; the less favourable scenario uses 3.9% nominal growth with the same interest rate.
“Key in these projections is a favourable differential between nominal GDP growth
and the interest rate,” the authors wrote. “That imparts a downward thrust to the debt burden.”
Laurin and Drummond argue that “it should not be taken as a given that the growth-to-interest-rate differential will always remain positive.”
Their baseline scenario uses average nominal economic growth of 3.50% (1.47% real growth) and an interest rate of 3.49%.
The Finance Department forecast the 2021 debt-to-GDP ratio of 51% would decline to the 30% pre-pandemic level by 2055; Laurin and Drummond see it rising to 60% instead. The combined federal and provincial net debt ratio could reach 140% by that time, they wrote.
“Things could turn out reasonably well, as in Finance’s scenario,” they wrote. “But they could
just as easily, and perhaps even more likely, turn out badly.”