At the Brink: Canada and the U.S. at a Debt Crossroads
- Protein Daddy
- May 1, 2024
- 2 min read
Canada and the U.S. face a looming fiscal inflection point as growing interest payments increasingly rival spending on essential programs. This escalating financial strain signals a potential fiscal crisis that could have profound implications for both nations' economic stability.
So how much debt are we talking about?
In Canada, the federal debt-to-GDP ratio is at 41.9%, while the U.S. sees its public debt hovering around 99% of GDP (Department of Finance, Congressional Budget Office).
This year, Canada is slated to spend $54 billion on debt servicing—surpassing what it allocates for health transfers to provinces. Similarly, in the U.S., for every dollar spent on defense, an equivalent amount is funneled towards interest payments (Jason Kirby, The Globe and Mail, April 20, 2024).
The IMF's forecast that the gross public debt of advanced economies will exceed 122% of GDP by 2028 underscores the global magnitude of this issue. The debt trajectory of both Canada and the U.S. reflects a broader trend of fiscal relaxation that, if unaddressed, could lead to credit downgrades and increased borrowing costs. Notably, Fitch downgraded the U.S. from AAA to AA+ last fall, with Moody's adjusting its outlook to negative, signaling eroding confidence in the U.S.'s fiscal health. The same downgrading trend has been happening to British Columbia's provincial government where it receives its third downgrade in three years by S&P Global Ratings.
The ramifications of these fiscal trends extend beyond national borders.
High debt levels can influence long-term borrowing costs for other countries and pose significant risks to the global economy. For instance, unchecked U.S. debt could precipitate a shock similar to what the UK experienced under Liz Truss, where bond investor confidence plummeted almost overnight.
Canada's scenario, while less dire, is not without its challenges. Despite a more favorable federal debt-to-GDP outlook, the aggregate provincial debt is expected to increase by more than $65 billion, marking a record jump equivalent to 2% of GDP. This surge in provincial debt, larger than during the first year of the pandemic, points to a potential fiscal vulnerability that could strain Canada's overall economic performance (Bank of Montreal report).
Conclusion with Electoral Context:
As elections loom in both Canada and the U.S., it is a pivotal moment to reassess government perspectives and set responsible fiscal policies. The electoral season could serve as a critical juncture for initiating serious discussions about fiscal sustainability and implementing measures that can ensure long-term economic health. Voters and policymakers alike must recognize the importance of fiscal prudence, especially in an era of rising demands for government services and the temptations of election-year spending.
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