Economists at the Fraser Institute warn that seven out of ten provinces have surpassed the threshold of having more combined debt than the value of goods and services they produce. They say that any more government spending at this point will impede economic growth.
According to the study, the combined federal and provincial debt for most of Canada’s provinces has exceeded the value of their economies. British Columbia’s debt was 79.2% of its GDP, Saskatchewan’s 77.5%, and Alberta’s combined debt was 63.8% of its economy.
The rest of Canada’s provinces had higher combined debt than their economies. Ontario had a debt-to-GDP ratio of 100.3% on the low end of this spectrum, and on the high end, Nova Scotia had a debt-to-GDP ratio of 114.3%. Manitoba had a combined debt of 141.4% of its GDP.
The study examined provinces’ debt-GDP ratios, comparing them with average economic growth rates.
“When using the same categories, we find provinces with debt loads below 60% have the highest median growth rate and that growth rates fall as debt ratios pass thresholds of 60% and 90%,” the study said. “This approach clearly suggests that higher provincial debt-to-GDP ratios correspond to slower economic growth.”
The study concluded that the short-term benefits of increasing government debt-to-GDP ratio through publicly funded investments decreased dramatically in regions with debt exceeding 100% of their GDP. It said that these provinces would not benefit from further government spending, which would increase the debt; instead, it found that increased spending beyond the 100% threshold often decreased economic growth, lowering living standards.
“High levels of government spending end up crowding out private investors, taking up some of the space that the private sector could have otherwise taken up, and also, over time, raising interest rates, driving inflation,” Jake Fuss, a senior fellow at the Fraser Institute told True North in an interview.
He said the rise in interest rates, the lowering of private investments, and the raising of inflation all reduce economic growth in the long run.
“The standard of living for Canadians ultimately stagnates when you don’t have that economic growth necessary to increase incomes and increase wages for Canadians,” he said.
He said high government spending is what endangers economic growth for the provinces.
“Whether it’s Manitoba, Quebec, Ontario, some of the provinces that are above the 100% debt to GDP ratios when you factor in federal debt, it’s really a factor of spending exceeding the growth rate in revenue in many cases,”
Fuss said the both the provinces and the federal government have been running persistent deficits over the last few years, and are also borrowing money to pay for services and infrastructure.
“It’s really a combination of their program spending exceeding the levels of revenue that they’re taking in currently, and also, at the same time, they’re taking on significant borrowing and debt for other things that are not necessarily annual expenditures,” he said.
According to Fuss, the problem of unruly government spending “plagues every provincial and federal government across Canada,” including those whose debt is lower than their GDP.
“Premiers really need to do a much better job of controlling spending and making sure that it’s not getting out of control and exceeding the level of revenue growth. And the federal government has run a persistent deficit for at least a decade now,” he said. “They need to do a comprehensive review of all spending that’s currently going on.”
He noted a previous study by the Frasier Institute. It found that if the federal government cut spending by 2.3% over the next two years, or $11 billion annually, it could balance the budget and lower taxes by 2026 while improving Canada’s tax competitiveness.
When True North spoke to Grady Munro, a political analyst at Fraser Institute, he said that the federal government spent $11.2 billion on corporate handouts in 2022 alone and recommended cutting that bailout spending to achieve the goal.
“The problem is, there hasn’t been a willingness to actually reduce spending over the next number of years. Instead, the plan is to continue running deficits indefinitely, and I think that’s a big problem,” Fuss said. “So the first step in that process is reducing all spending measures.”
