Iggyâ€™s Deficit Wall
I just saw Michael Ignatieff on TV warning that Canada could hit â€œthe deficit wall.â€ I assume he means â€œdebt wall.â€ (I would not fault a slip of the tongue, but the written text of a recent speech also incorrectly calls it â€œthe deficit wall.â€)
The concept is not that a country hits the wall because a particular annual deficit is too high. The fear is that, if a governmentâ€™s accumulated debt grows too large relative to its potential tax base, lenders will stop buying its bonds. Therefore, the relevant measure is the ratio of public debt to national economic output (Gross Domestic Product).
The last time Canada supposedly came close to hitting the wall was in the mid-1990s, when federal debt peaked at 68% of GDP. (Using a somewhat broader definition of debt than Finance Canada, the OECD calculates a peak of 71%.) There was important debate about the alleged proximity of the debt wall even then, but this recent peak still provides a useful benchmark.
At the end of the last fiscal year, the federal debt was only 29% of GDP. Septemberâ€™s Fiscal Update projects that, by 2014-15, debt and GDP will expand to $628 billion and almost $2 trillion respectively. In other words, the federal debt-GDP ratio will be 32%, less than half the level reached in the mid-1990s.
Of course, a key Liberal theme is not trusting Conservative numbers. (While scepticism of government fiscal projections is completely warranted, it also conveniently allows Ignatieff to avoid stating whatÂ budgetary changes he would make.)
However, alarm about hitting the wall is inane even given completely different fiscal assumptions. Statistics Canada reports that GDP is currently running at an annualized rate of $1.5 trillion. Assuming no economic growth and no inflation, the debt would still need to surge above $1 trillion to reach 68% of GDP.
To increase the federal debt from last yearâ€™s total of $464 billion to above $1 trillion would require annual deficits of $56 billion not only this year (as projected), but also for nine more years. In other words, getting within hailing distance of the debt wall would take a whole decade without any economic growth, inflation or deficit-reduction.
Even these incredibly pessimistic assumptions reveal that the federal government has ample room to increase public investments and expenditures without getting into fiscal trouble. The Official Opposition should criticize the government for failing to invest and spend enough in response to the economic crisis, rather than for approaching a mythical â€œdeficit wall.â€