The Global Financial Crisis (GFC) rocked Canada, just as it did the rest of the world. The crisis caused many effects in Canada, but one of the most substantial was the rise in national debt. The national debt is the collective amount of money publicly owed by the government of Canada to various creditors. It includes debt that is owned to other governments, to private creditors, and to all holders of Canadian treasury notes, which are issued to raise capital by the government. The GFC caused the Canadian national debt to grow in a big way. During the period following late 2007, Canada’s debt ballooned to over $600 billion, causing politicians and many members of the public to call for changes in spending and budgetary policy. While it may seem easy to just snap out a balanced budget, it is not so simple. The Canadian government has responsibilities to many parties, including to the public, which depends in some ways on the social safety net. Still, efforts have been undertaken to ensure that the national debt gets back in order, with Canada coming up with a surplus over the last few years.
The GFC was something mostly caused by problems in the American economy. Namely, banks in the United States engaged in a series of risky ventures, including predatory lending and dealing in mortgage backed securities, which toppled the housing market. Ultimately a bubble was created. People were in homes they could not afford, and it was almost certain that they would not be able to pay back their mortgages. Because a series of securities had been sold backed by mortgages, the entire system faced more risk than it might have otherwise. Importantly, the GFC ended up causing carnage in America, with exports slowing down, American consumer spending going down, and unemployment shooting up. Canada depends in many ways on the American economy. Being the biggest trade partner with the US, Canada depends on the US both for exports and to buy Canadian goods (Lane 189). When American spending cratered, it caused exports in Canada to slouch, the housing market to decline because of fear of individuals, and consumer spending to go way down in light of the problems in the US. What this led to was a decline in GDP in Canada, as production slowed. The problems with Canadian unemployment can be seen in the graph below:
In comparison to the US and other countries, Canada in the lead-up to the GFC did not carry that much debt. It did carry some, of course, and this was critical to its financial situation, but the level of Canadian debt was not a primary contributor to the crisis. However, the crisis did add more to the Canadian national debt. One of the problems for Canada as the crisis grew was that the country depends in a major way on stable, high prices for the commodities that it ships. Namely, the Canadian economy is very much based on oil (Karanikolos 208). Being one of the world’s biggest producers of oil, when oil prices drop, as they did during the GFC, Canada is hit quite hard. When the crisis hit, unemployment in Canada went up because companies had to lay people off in light of the struggles in the economy. When Canadian companies began to lay people off, it caused major problems overall for the country. Namely, more people were claiming unemployment, and the Canadian government had to engage in more social spending.
This is the nature of recessions globally, and in a place like Canada where there is a strong tradition supporting the global safety net, there is no option to just stop spending. GDP declines lead to higher unemployment, and this necessitates the government spending money to ensure that human beings are protected. At the same time, the GFC caused the tax base to be eroded. Typically, the spending in Canada would be fueled by expanses in corporate tax receipts. However, when the GFC hit, companies made less, and thus, they had less to pay in taxes. This meant that the Canadian economy was basically hit with a double whammy. Not only did it have to pay more because social spending was required to support the populace, but they were able to collect less money in taxes (Ruckert & Labonte 2). This led to deficits, which added more money to the national debt. The changes in GDP can be seen illustrated in the graph below:
As Canada has been able to recover from the GFC, more people have called for tighter fiscal controls. They have called for the Canadian budget to be balanced so that there would no longer be these problems. This has led to some cuts in social spending, as well as rising taxes. However, the improvements in the economy has also helped, as GDP has gone up, and thus, the tax base has returned. These factors together have allowed more fiscally conservative policies to flourish in the country, with deficits going down. Of course, Canada is not burdened by the massive defense spending budget that one sees in the United States, so the country is able to provide many things for its citizens while also keeping costs down and balancing its budget.
The GFC caused major problems for the Canadian economy. It crushed exports and made the US, the largest trade partner with Canada, much less able to support Canadian commodities. This led to Canada struggling in many ways, with its budgets getting out of control. The GFC ended, and both the economy of Canada and the economy of the US improved. This allowed budgets to return to normal and Canada to, at the very least, stop adding to its debt.
- Karanikolos, Marina, et al. “Effects of the global financial crisis on health in high-income OECD countries: a narrative review.” International journal of health services 46.2 (2016): 208-240.
- Lane, Philip R., and Gian Maria Milesi-Ferretti. “The external wealth of nations revisited: international financial integration in the aftermath of the global financial crisis.” IMF Economic Review 66.1 (2018): 189-222.
- Ruckert, Arne, and Ronald Labonté. “The global financial crisis and health equity: early experiences from Canada.” Globalization and health 10.1 (2014): 2.