Elevated government debt…. not a concern for now

Mar 26, 2021 | Elinesky Schuett Private Wealth Management


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In our featured economic commentary this week, we discuss why increasing government debt burdens that are being used to fund the massive aid programs are not a concern for now. In addition to our commentary, we’ve included two other economic updates that may interest you:

  • Video: Investment Outlook Spring 2021
  • Podcast: Lessons in lockdown, one year later

Are you looking for a more in-depth economic update? You can RSVP early for our 2021 Global Outlook online event, featuring Kurt Reiman from BlackRock.

We are continuing on our tax theme this week, and have included a link to an article with information for business owners, Tax Tips for Business Owners: Filing your 2020 Return. There is also a link to a short article full of good information to keep you safe online, Take 2 Minutes: Phishing.

Please note that our office will be closed on Good Friday, April 2, and we will not be publishing our weekly update next week. We will be back answering your phone calls and emails on Monday, April 5, and our weekly blog will be posted the following Friday.

Don’t forget to check out our good news stories from in and around our community at the bottom of this page!

Economic Update

Global equity markets were modestly lower over the past week, and the investing backdrop hasn’t changed much over the past month. The global economy has been resilient and, despite renewed concerns on the virus front, investors expect growth to strengthen as the year progresses. The heightened volatility in bond markets has subsided to some degree as central bankers have tried to reassure investors that policy will remain very supportive. Nevertheless, inflation concerns linger in the background and are the primary reason equity markets have struggled to push higher. This week, we provide an update on the virus front and explain why the significant increase in debt that governments are using to fund their large aid programs is not necessarily concerning.

Coronavirus update

Canada experienced a meaningful increase in new cases over the past week. The seven-day average rate of new daily infections rose to 4,500, versus the 3,300 from the same period a week ago. The third wave of the virus now appears to be spreading across much of the country, with most provinces reporting higher rates of infection. The highest growth was in Alberta and Saskatchewan, while Ontario and British Columbia also saw relatively sharp increases. Even Quebec experienced a move higher for the first time since the beginning of the year. The East Coast also experienced an uptick, driven primarily by New Brunswick, while Manitoba and the Northern Territories were the only regions to see limited change.

Elsewhere, countries across major continents – the Philippines, Pakistan, Poland, and Peru for example – are grappling with high and rising cases. The notable exceptions are the United Sates, the United Kingdom, and Israel, all of whom are further along with their vaccination campaigns.

Elevated debt…. not a concern for now

Over the past year, nearly every government around the world has stepped in with financial support for individuals and businesses that have been impacted by the pandemic. That kind of response is unsurprising, particularly given the exogenous nature of the crisis, but the amount of spending undertaken has been relatively incomparable throughout history. Moreover, governments may not yet be done.

The U.S. government, for example, recently approved an aid plan that amounted to nearly $2 trillion, which adds to the sizeable amount of stimulus approved last year, and there are growing expectations of an infrastructure oriented package that could amount to as much as $3 trillion.

Governments everywhere are largely funding these massive expenditures by way of new debt. According to the International Monetary Fund, the amount of global government debt jumped significantly last year. More specifically, government debt as a percentage of global economic output, rose to 98 percent, from a relatively high level of 84 percent the year before. 

Typically, being heavily indebted is an unenviable position. For the average person for example, an increasing debt burden presents a financial risk as people have a finite number of working years available to pay off their liabilities, but governments don’t ever retire. Rather, governments have an unlimited period with which they can try to reduce their debt load. The simplest way is through economic growth that could lower a country’s debt-to-GDP ratio. Another approach would be to generate inflation, which effectively reduces the principal amount of outstanding loans. Two additional measures include an increase in taxes and a decrease in spending, both of which can be difficult to implement given political forces. Nevertheless, there are plausible scenarios in which governments can see their debt levels fall over time. With a growth outlook that is set to expand over the next few years, the debt levels may modestly improve over the near term horizon, but it will take considerable time and a sustainable economic trajectory to see more meaningful progress.

In the meantime, the low interest rate environment has made the debt burdens relatively affordable for most governments. Perhaps surprisingly, the total servicing costs for some countries is set to decline over the next few years despite meaningfully higher debt; a function of countries being able to refinance maturing loans at much lower interest rates. In our view, the biggest risk is not necessarily default, but rather the reduced capacity for heavily indebted countries to act in the future when another recession or crisis inevitably emerges.

Investment Outlook Spring 2021

In this video, RBC Global Asset Management’s Chief Economist, Eric Lascelles, shares his positive economic growth outlook amidst vaccine progress and U.S. fiscal stimulus. He also comments on rising inflation concerns, observing the upward pressures that pose mild risk.

Watch the video online: Investment Outlook Spring 2021

Lessons in lockdown, one year later

Text: RBC Global Asset Management. Lessons in lockdown, one year later. The download. Image is two men in suits smiling at the camera. They are standing in a boardroom.

It’s been a year since most of the world went into lockdown. What have we learned since then? RBC Global Asset Management’s Stu Kedwell, Co-Head, North American Equities, looks back at the lessons investors can take away from lockdown. Stu also explains how having a strategy, such as dollar-cost averaging, can help investors remain disciplined and find opportunities in times of uncertainty.

Listen to the podcast online: Lessons in lockdown, one year later

7 minutes, 58 seconds


Take 2 Minutes: Phishing

Take 2 minutes. Graphic with a mobile device, key, and lockPhishing email scams are a common trick used by cybercriminals. So how to you make sure you're "the one that got away?" What it means and how to stay safe — in two minutes or less.

You can read the full article online: Take 2 Minutes: Phishing


Tax Tips for Business Owners: Filing Your 2020 Return

Close up photo of a person working at a desk on a calculator. They are holding receipts and have notebooks on the desk.

Last year, many Canadians became business owners for the first time. Other companies were supported through challenging times by government loans and subsidies. Millions of employees began working from home. All of these circumstances have an impact on your 2020 tax return.

You can read the full article online: Tax Tips for Business Owners: Filing Your 2020 Return


Hyperlink image to RSVP Email. Image shows man holding a tablet and pointing at a graph on the screen. Text over image: Save the Date. 2021 Global Outlook with Kurt Reiman, Senior Strategist for North America, Blackrock. April 28, 2021, 1 p.m. - 2 p.m., Online, via WebEx. Click here to RSVP early. Graphic numbers: 04 28 21

Community Corner

Each week, we like to end our posts with a few good news stories from in and around the community. We hope that they brighten your day!

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.