Reducing Government Debt Could Boost Average Canadian Worker Incomes by $2,100 a Year: Study

A magnifying glass enlarges the holographic image of Parliament Hill's Peace Tower on a 20 dollar bill issued by the Bank of Canada, shown in a display case at the Bank of Canada Museum in Ottawa, on Sept. 4, 2024. The Canadian Press/Justin Tang

Reducing government debt in Canada could boost incomes for average workers by around $2,100 per year, a new study has found.

If Canadian governments reduced their debt relative to the size of the economy (GDP) over five years back to pre-pandemic levels, it would increase productivity and boost incomes for average workers by $2,100 a year, says the study published by the Fraser Institute on June 24.

“Labour productivity plays a crucial role in improving living standards and powering economic growth, but government deficits and debt in Canada are a detriment to productivity, and in turn are making life worse for Canadians,” the report’s author Ergete Ferede said in a June 24 news release.

Labour productivity is the level of output produced per unit of labour, such as the value of goods and services produced per hour of labour, which is the “key to fostering economic growth and improving living standards,” the study says.

Canada’s largest increase in government debt compared to GDP occurred in 2020 as a result of the pandemic, which the study noted had “adverse effects” on the overall economy and tax revenue, as well as increased government spending.

The country’s general government gross debt represented roughly 107 percent of the national economy in 2023, which is the latest year with complete data. Canada ranked seventh-highest for its debt relative to the size of the economy among 38 advanced countries, and the highest among the G7 countries.

The study found that the federal government’s gross debt has a negative impact on labour productivity, and that a 10 percentage point reduction in the debt-to-GDP ratio would increase the growth rate of labour productivity by about 1.04 percent.

“Deficits and debt have many costs, including a less productive workforce and lower wages for Canadians than they otherwise would enjoy,” Ferede said.

“Governments in Canada should curb their dependency on deficit-financed spending so Canadians can enjoy higher labour productivity and higher living standards.”

Ferede’s study indicates that if the federal government reduced its debt-to-GDP ratio gradually over the next five years, labour productivity would increase by about 1.6 percent at the end of the fifth year. Canada’s work output per hour would rise by $1.01 and could therefore increase average workers’ annual incomes by approximately $2,100 per year, the study says.

The Canadian government should aim to reduce its national debt by limiting deficit-funded spending in order to reverse the decline in labour productivity and improve living standards for Canadians, the study suggests.