Canadians spend $163 for every $100 earned. Public debt has passed the $700 billion mark and will burden future generations. Moreover, high debt levels can cause interest rates to go up, which will have a negative impact on economic growth and private sector activity. Economic experts recommend measures such as fiscal councils and rules, fiscal responsibility laws, and changes in government spending. Healthcare and pension reforms are also policies that reduce spending for aging populations.
There are three scenarios – the government can print money, cut debt, and raise taxes. The problem with the third solution is that some people go to extremes to avoid taxes. The budget deficit can decrease significantly through deep budget cuts. In fact, this is what happened in Canada during the 90s. Other debt reduction strategies include default, bailout, interest rate manipulation, and issuance of government bonds. Interest rate manipulation, for example, increases tax revenue and stimulates economic growth. Whatever strategy the government chooses, the aim is to restore debt ratios to more manageable levels.
Infographic courtesy of Canadian Mortgages
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