Julie Gordon, Fergal Smith

OTTAWA, (Reuters) – Canada’s Prime Minister Justin Trudeau has announced that his new government will impose higher taxes. This will fund campaign promises, but not enough to pay down Canada’s debt record. Analysts say this could make Canada more vulnerable to economic crises in the future.

It could prove to be risky for Canada, as the country accumulated debt more quickly than any of its Group of Seven members during the pandemic. Canada could be unable to meet long-term financial challenges such as the transition from an oil-reliant to green economy. This high degree of debt might limit Canada’s ability manage it.

Analysts say Canada’s debt-to GDP ratio after the pandemic is much higher, which means it has less room for responding to any future crisis.

Essentially, Canada’s large debt burden “does not leave significant fiscal space to offset major new shocks,” said Kelli Bissett-Tom, director of Americas sovereign ratings at rating agency Fitch Ratings.

Fitch has already stripped Canada of a triple-A credit rating, but S&P Global (NYSE:) Ratings and Moody’s (NYSE:) Investors Service still give Canadian debt the highest rating.

Canada’s Liberals have pledged C$78 Billion ($63.1Billion) to increase spending in the next five years. This is approximately 4% of Canada’s gross domestic product. They also promised C$25.5Billion in tax revenue over that same time period. These revenues mainly target tax evasion and wealthy individuals as well as big banks, insurers, and large corporations.

To pay for additional spending on all things, from school lunch programs to mental healthcare, the idea is to tap into those who survived the worst. These taxes will not help Canada pay its record-breaking C$1 trillion in national debt nor be enough to balance the budget.

It is risky as the debt costs will eventually rise. Economists predict that future governments may have to reduce services or increase taxes to deal with this burden.

“The current generation won’t be able to repay anything that is related to the price of the pandemic.” Don Drummond from Queen’s University is the Stauffer-Dunning Fellow.

TAKE THE RICH TAX

Canada is not the only one looking at taxing wealthy individuals to help pay COVID-19-era expenses. However, countries such as the United Kingdom have begun to reduce their debt in new tax plans. Western European nations signal that public debt won’t continue to rise.

Canada’s gross ratio of debt to GDP jumped by 36% to 118% in the last year thanks to large government aid packages to individuals, businesses and other wealthy countries.

Graphic: Gross debt-to-GDP of G7 nations, https://graphics.reuters.com/CANADA-ECONOMY/TAXATION/xmpjolnjevr/chart.png

This ratio includes federal and provincial government debt. It is expected to fall to 113% by 2022 based on economic growth projections rather than repayment.

Canada’s share of the global economy falling over time will bring some fiscal discipline. But that fiscal “anchor” can be prone to breaking during tough times, according to economists at BMO Capital Markets in a post election note.

Trudeau’s Liberals were unable to win a majority at the Sept. 20 election. They are dependent on the New Democrats (NDP), who will pass legislation. This party might pressure Liberals to spend more in return for their support.

Liberals pledge to raise the corporate tax rate of big banks and insurers as well as to introduce an additional payment for those businesses in order to support the recovery. In addition, the government plans to establish a minimum tax for high-earners.

Trudeau’s Liberals must have support at least from one party for any legislation to be passed, such as changes in tax laws. NDP supports tax increases for big businesses and very wealthy.

We had lots of fiscal room, quite a bit. Dominique Lapointe from Laurentian Bank was senior economist and spoke out about the record government stimulus that helped support the economy.

“People are concerned because we used that fiscal room and we’re continuing to add new measures.”