In these troubled times, Ottawa should consider spending more, borrowing more

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John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

Canadians have been seized with urgency by the coming federal election, seen as the most important since at least 1988. Faced with the sudden challenge of a less friendly southern neighbour, the country is looking for ways to lessen its dependence on the United States. The good news is that should the next government choose to make significant investments to reorient the country to markets and security partners elsewhere, as is being considered, Canada should have the credit to do it.

Such a claim will alarm more prudent Canadians, already troubled at the scale of the country’s borrowing. While Canada’s national debt is low by international standards, at less than 50 per cent of GDP, once one includes provincial debts it rises to 75 per cent. But the question here is not whether Canadian governments have taken on too much debt, but rather if the country’s creditors would still be willing to lend on favourable terms to a government wanting to make significant investments. Currently, all indications suggest they would.

To begin with, that 75-per-cent ratio is not high by international standards. Among the G7 countries, only tightwad Germany has a lower ratio, at a little more than 60 per cent. The U.S.’s is much worse, and Japan’s tops the table, at more than 260 per cent. And while fund managers looking to buy government bonds have a slew of seemingly more bankable options in the developing world, where many countries with fast-growing economies have low debt ratios, their less-developed capital markets and younger reputations add a premium to the rates investors charge them.

Reflecting this, the terms on which Canada borrows are among the most favourable in the world, with the 10-year bond presently paying just over 3 per cent annually in interest. In the G7, only Germany and Japan pay less.

Meanwhile, foreign central banks have parked a significant chunk of their foreign reserves in Canada – more than $450-billion as of the end of last year. While this is not a pool of lendable funds, it is a clear vote of confidence in Canada by foreign central banks, not least because they increased their Canadian reserves faster than those of any other major currency last year. Put simply, most of the world continues to have faith in Canada.

That helps to explain why, despite the remarkable string of external shocks that has beset the Canadian economy since U.S. President Donald Trump took office, the Canadian dollar has remained stable. Yes, the loonie had fallen from 73-74 US cents to below 70 US cents, a level not seen since the early 2000s, but it has been a relatively small and manageable decline in the grand scheme of events. As well, amid the Trump chaos, U.S. interest rates on bonds have risen more quickly than Canadian ones, which may in part reflect a perception of greater stability in Canada, and thus a continuing low-risk premium.

One thing to bear in mind about public debt is that in developed economies it tends to vary inversely with private debt. Over time, a decline in one corresponds to a rise in the other, and it’s not always clear which is preferable. In recent years, Canada’s household debt rose and went largely into fuelling a housing bubble, which did the economy little if any good.

So while an expansion of government debt would keep a lid on private borrowing, if it raised long-term economic growth prospects, it could ultimately incentivize productive private investment.

Still, any increase in government borrowing would need to be used for capital and not current expenditure – building stuff, rather than cutting taxes or raising salaries. The contrast between Germany’s recent announcement of a huge infrastructure program with Britain’s budget fiasco three years ago is instructive: German bond yields rose moderately, but investors didn’t bail because they were in effect getting collateral. In contrast, in 2022 then-British prime minister Liz Truss planned to borrow to cut taxes, saying the economy would then take off. Investors didn’t share that faith, and dumped U.K. gilts as if they’d become toxic.

That’s worth keeping in mind, given that both major parties are promising voters tax cuts without spelling out in much detail how they’d fund them. Good credit is a precious thing. Used wisely, it could enable Canada to rise to the moment. But it’s not an excuse to throw caution to the wind.

This is not the post-2008 global landscape, when capital was cheap and underwritten by Western central banks. Those days are gone forever, and historians may one day wonder why governments didn’t use the opportunity they had then to build for the future. Still, as Canada faces a new generational challenge, its international credit is good, and that can go a long way to help navigate these difficult times.