OTTAWA—A new study released today by the Canadian Centre for Policy Alternatives finds that, contrary to popular belief, it does not make economic sense for the Canadian government to pay down the national debt.
The study, by Tony Myatt and Joe Ruggeri of the University of New Brunswick, examines the assertion by many economists that lowering the debt-to-GDP ratio will have a substantial positive effect on the standard of living. The consensus estimate is that permanently reducing the debt-to-GDP ratio from 80% to zero would raise the long-run level of consumption by around 8%.
However, Myatt and Ruggeri argue that these estimates cannot be used to justify using budget surpluses to pay down the debt because balanced budgets alone are sufficient to shrink the debt-to-GDP ratio—even without debt repayment. Debt repayment simply speeds up the automatic rate of decline in this ratio by a few years.
“For example,” Myatt explains, “even if half of every budget surplus were used for debt repayment over the next 30 years, the debt-to-GDP ratio would only be 6 percentage points lower than without debt repayment. The gain from all this sacrifice would be only a 0.6% increase in real consumption—a number so small it would be impossible to distinguish it from statistical error.”
“In the current Canadian context efficiency arguments for debt repayment do not hold water,” Ruggeri says. “The portion of the surplus that is allocated to debt repayment is not available for tax reductions or increased public investment. In this context, the question is not what will we gain from debt reduction, but how much will it cost us?”
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The Vanishing Efficiency Gains of Debt Repayment is available on the CCPA web site at http://www.policyalternatives.ca
For more information contact Kerri-Anne Finn, CCPA Communications Officer, at 613-563-1341 x306.