Highlights

• Canada is the world’s 6th most indebted jurisdiction, owing around 3½ times GDP, and having increased total indebtedness by more than any other jurisdiction during the COVID-19 pandemic.

• Even before the crisis, when the economy was supposedly “solid” and unemployment was low, Canada was already the world’s 7th most indebted jurisdiction. The household, corporate and government sectors are all highly leveraged relative to other jurisdictions.

• Households and corporations (i.e. the private sector) spend about one-quarter of income servicing debt through interest and repayments of loan principal. This is a record high and well above most other countries. A high debt-servicing ratio is considered an early warning indicator of future macroeconomic and financial instability.

• Despite its heavy borrowing, Canada generated virtually no growth in real GDP per capita over the five years to 2019.

• The best way to reduce indebtedness going forward is to generate faster per capita economic growth through productivity improvements. Growing out of indebtedness through rising income per person is far more attractive than implementing austerity measures.

• Canadian policy discussions tend to be preoccupied with expanding the population and labour supply through stepped-up immigration levels. This city-centric and labour-intensive strategy does increase GDP – but it has negligible overall impact on GDP per capita, labour productivity, or real wages.

• In contrast, higher productivity growth has the advantage of raising people’s living standards by increasing GDP per capita and average real incomes. Making the workforce more productive per hour worked – by reviewing the incentives facing private sector investment in productive capital, technology, skills, innovation, and scale – is also the best solution to the challenge of population aging.