Adrift without an anchor: federal fiscal policy and Canada’s long-term debt ratio

Abstract

This research bulletin tests whether the federal government’s fiscal policies are consistent with its fiscal anchor—a declining debt ratio over the next 25 years—using a Monte Carlo simulation model with random shocks to the growth rate similar to those experienced by the Canadian economy over the last 40 years. Since the pandemic, the federal government has postponed reducing its deficit because it has continually revised program spending upward. The deterioration in the federal fiscal position over the past year, with larger projected deficits, interest rates, and debt levels, has increased the likelihood of higher debt ratios in the future. Our model indicates that there is a 44% chance that the net debt ratio will be higher in 2036/37 and a 59% chance that it will be higher in 2046/47. We conclude that the federal government’s claim that its fiscal policies will lead to a downward trend in its debt ratio is not credible because it ignores the likelihood that future recessions will result in larger budget deficits.