How government deficits impact productivity and personal incomes
Canadian workers could enjoy a pay rise of an average $2,100 if Canadian governments were to cut their borrowing to pre-pandemic levels.
A new study published today (June 24) by Fraser Institute senior fellow Ergete Ferede says that reducing debt relative to GDP over five years, would boost incomes for Canadian workers and boost productivity, an issue consistently flagged as a key issue for the economy, although there has been some improvement according to recent data.
"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," said Ferede.
His study The Impact of Government Debt on Labour Productivity in Canada reveals that Canada's burden of general government gross debt represented about 107% of the national economy in 2023 (the latest year of comparable data). That puts Canada seventh highest for debt relative to the size of the economy among a group of 38 advanced countries.
However, labour productivity could improve by 1.6% if governments gradually reduced debt relative to the size of the economy, providing a 40-hour-a-week worker with the four-figure income lift.
"Deficits and debt have many costs, including a less productive workforce and lower wages for Canadians than they otherwise would enjoy," Ferede explained. "Governments in Canada should curb their dependency on deficit-financed spending so Canadians can enjoy higher labour productivity and higher living standards."
In its most recent Economic and Fiscal Monitor, the Parliamentary Budget Office stated that Canada’s real GDP grew by a stronger-than-expected 2.2% in the first quarter of 2025, while the federal government is expected to run a deficit of $46.0 billion (1.5% of GDP) for 2024-25. However, with an increased commitment to defense spending, this could be significantly higher.
