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Canada on deficit-paved path to debt crisis?

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TORONTO

Canada could be on the deficit-paved path to a debt crisis.

Lakehead University Economics Professor Livio Di Matteo, author of the Fraser Institute report A Federal Fiscal History, said he looked at Canada’s history of deficits and debt for the country’s 150th birthday.

It turns out the country has been in the red for about 75% of that time.

“On average, the country spends more than it takes in,” Di Matteo said.

But the only other time that the federal government ran up a significant stretch of annual deficits — with the exception of wars and economic calamities — was during the Liberal Lester Pearson and Pierre Trudeau governments of the 1960s and 1970s, he said.

Like today, interest rates were relatively low but the level of debt quickly became a crisis when rates later spiked, forcing deep public spending cuts in the 1990s, Di Matteo said.

The Justin Trudeau government is clocking a $29.4-billion deficit in 2016-17.

“The finance department has already projected that there could be deficits continuously all the way to 2051,” he said. “Right now, even though the debt-to-GDP ratio looks quite reasonable and the deficit as a share of GDP looks small, a lot of it is under assumptions of continued relatively low interest rates.”

Just a few percentage points on the approximately $750 billion in federal debt would quickly drive up how much the country owes, he said.

The Pearson-Trudeau deficits ran for 27 years consecutively — the most in the country’s history — with Trudeau leaving office in 1984 without ever having balanced the books, Di Matteo added.

“They were then followed by the longest ever string of surpluses and that was only 11 years — 1997-2007,” he said.

In the country’s early years, the government ran up debt to ensure the transcontinental CPR railway connected a new nation, he said.

Government spending also ramped for the two world wars and during depressions and recessions, he added.

“Those were situations where I suppose you could understand it,” Di Matteo said.

The Canadian economy is experiencing low growth but is not in recession, yet Trudeau has no foreseeable plan to balance the books, he said.

“My question is how you can plan for a scenario where you basically want to run deficits steadily for the next 30 or 40 years,” Di Matteo said. “I really found that a bit disturbing.” 

aartuso@postmedia.com

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