Reducing government debt in Canada could boost incomes for average workers by $2,100 a year

By Ergete Ferede, Professor of Economics, MacEwan University in Edmonton.

The Impact of Government Debt on Labour Productivity in Canada

• Labour productivity plays a crucial role in powering economic growth and improving living standards. Consequently, many commentators express their concerns over the slowdown of Canada’s productivity, which became more pronounced after the COVID‑19 pandemic.
• A legacy of the pandemic is the rise in budget deficits and government debt at both federal and provincial levels. Canada’s ratio of general government gross debt to GDP surged by 28 percentage points from 2019 to 2020, the highest among the G7 countries. Currently, Canada has the 7th highest debt ratio among 38 advanced economies.
• This study investigates the impact of Canada’s general government gross debt on labour productivity. It finds that a ten percentage-point reduction in the ratio of general government gross debt to GDP increases the growth rate of labour productivity by about 1.04%.
• The study suggests that, if Canada’s ratio of general government gross debt to GDP were gradually reduced over five years to its pre-pandemic level, labour productivity would increase by about 1.6% at the end of the fifth year, compared to the baseline scenario where there is no debt reduction. This would raise Canada’s output per hour worked by $1.01 and could boost the annual income of an average employee working 40 hours a week by approximately $2,100, adjusted for inflation.
• A key policy takeaway is that governments should curb deficit-financed spending and reduce debt to reverse the slowdown in labour productivity. In this context, relying on credible fiscal anchors could help the government prevent excessive debt accumulation during adverse budgetary shocks.