WATERLOO, ONT.—Conventional wisdom would suggest that government budgets should alternate with economic cycles: surpluses during economic expansions and deficits during contractions. In the past, deviations from this approach have led to subsequent fiscal challenges for Canada; profligate federal and provincial spending through the 1970s and into the early 1990s led to debt in excess of 100 per cent of GDP and necessitated significant spending cuts in the mid-1990s to reduce the debt and associated servicing costs. The current federal government returned to deficit spending while the economy was still expanding, which reduced the available fiscal capacity when the COVID-19 pandemic began. With interest rates already near historic lows, current monetary capacity to stimulate the economy is also diminished. Yet while no serious voice would suggest the government stop its current efforts to sustain the economy, the politicians and policy-makers who will be tasked with addressing Canada’s future fiscal situation likely have not yet begun their careers.
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