NEW REPORT: Canada’s Twin Deficits and How to Scale Them, by David Dodge

OTTAWA, Sept. 15, 2020 (GLOBE NEWSWIRE) -- In the wake of COVID-19, households and businesses—not just governments—will have much more debt to service in 2022 than they had in 2019. There are two deficits to be serviced:  public debt and current account deficit, according to former Bank of Canada Governor David Dodge. In a report for the Public Policy Forum’s Rebuild Canada program, he identifies the need for a new fiscal anchor for the federal government, and offers an alternative to the debt-GDP measure that has been used to date.

The fiscal challenge:

With federal government debt set to grow by perhaps $500 billion this year and oil destined to bring in less revenue, the current account deficit will be under yet further pressure.
Right now, confidence in Canada is intact. But what happens when foreign debt holders seek the assurance of higher rates or issuing their debt in non-Canadian currencies. That puts pressure on the dollar and on interest rates.
So, how do we avoid such an eventuality? The answer to Canada’s twin deficits – is to take measures to accelerate economic growth.

Facts and Arguments:

  • Canada has recorded 11 consecutive negative years in our economic relations with the world.
  • This current account deficit is running about $60 billion a year, reflecting the penchant of households, businesses and governments toward borrowing for present consumption over investing to generate productivity increases that will enable future income growth.
  • COVID is going to make the deficit worse because Canada will be paying more interest on borrowing to the rest of the world and the energy sector, which still props up the economy, will be bringing in less money. (Energy produces a positive net return of $76 billion a year, 90% from oil and gas.)
  • Canadian business now invests more out of the country than within. An $800-billion gap has opened up in the past decade.
  • The fiscal deficit is not out of control but needs to be controlled, including bringing it down in steps to 1% of federal revenue. The key to managing the fiscal situation lies in the equation of Growth minus Interest Rates (G – R). We are in deep trouble if that number goes negative.
  • The standard measure of debt-to-GDP ratio is no longer useful as a fiscal anchor. Instead, we should establish a target percentage of federal spending devoted to interest payments on the debt. If we can get that number back down to 1% and hold it there, our debt level is manageable.

A Growth Plan:  Five Priorities

This paper sets out priorities to use policy to increase economic growth beyond the projections from before the crisis, which no longer are sufficient to the task at hand.

  1. Enhance digitization of production of goods and especially services.
  2. Extend the life of a cleaner resource sector and facilitate a higher value-added composition.
  3. Maximize participation and adaptation of labour force.
  4. Enhance effectiveness and efficiency of public services.
  5. Restore confidence in fiscal stability.


“Coaxing more growth out of the economy has gone from a major policy challenge to an absolute necessity. We need to capitalize on the opportunities presented by our domestic adaptation to COVID and by COVID-induced changes in global demand to reset our strategies for boosting the value-added sectors of our domestic production and by raising productivity. This will require Canada to move swiftly and with determination to enhance digitization of our domestic production processes for both goods and services.”  David Dodge, former Governor of the Bank of Canada

The paper is available here:


Rebuild Canada, by Public Policy Forum:
The Rebuild Canada project lays down a foundation of insights, ideas, options and strategies for turning the COVID-19 pandemic into a catalyst for a new plan for Canada.
It includes a series of 20+ papers written by an array of leading policy thinkers addressing key themes such as the macro economy; the determinants of growth and Competitiveness; geopolitical relations and the labour market and income security.  Online convening, discussions and debates continue throughout September and October, culminating in the Rebuild Canada Growth Summit in October/November.

Heather Cavanagh, Dir of Communications, Public Policy Forum  (email preferred)

Tomek Sysak, Marketing Specialist, Public Policy Forum  (email preferred)