Bank of Canada Governor Warns of Dangers of Rising Deficits and Debt

Strategic Insights -

Bank of Canada Governor Gordon Thiessen has sounded the alarm on the dangers of rising government deficits and debt, warning that they can lead to increased interest rates and economic instability. In a speech to the Halifax Board of Trade, Mr. Thiessen stated that large deficits and accumulating debt can cause nervousness in financial markets, leading to higher interest rates. He emphasized that the central bank would intervene to cool down the economy if governments fail to show fiscal restraint and the private sector expands rapidly.

Key Takeaways:

  • Bank of Canada Governor Gordon Thiessen has warned of the dangers of rising government deficits and debt, stating that they can lead to increased interest rates and economic instability.
  • Mr. Thiessen emphasized that large deficits and accumulating debt can cause nervousness in financial markets, leading to higher interest rates.
  • The central bank would intervene to cool down the economy if governments fail to show fiscal restraint and the private sector expands rapidly.
  • The Bank of Canada's commitment to inflation control targets is "without reservation," but controlling deficits and debts would make Mr. Thiessen's job easier.
  • The possible effects on interest rates of the coming Quebec sovereignty referendum are "completely intertwined" with debt levels.
  • Most economists expect interest rates to remain stable in the short term, with some concerns about inflation pressures building in the future.
  • The underlying rate of inflation is currently below 2%, and the economy is showing considerable momentum.

Statistics:

  • The federal deficit was $42 billion in 1993-94.
  • The Bank of Canada aims to control inflation to a rate of 2% or less.
  • Long-term interest rates in countries like Japan have gone up by less than in other countries.
  • Long-term rates have risen "by significantly more" in Canada, Italy, Sweden, Britain, and Australia, which have high inflation, budget deficits, weak currencies, and political uncertainty.
  • The Bank of Canada will continue to maintain a low-inflation policy regardless of the government's fiscal policy.

Sources:

  • Ottawa Citizen, "Bank of Canada Governor warns of dangers of rising deficits and debt"
  • Canadian Press
  • Speech to the Halifax Board of Trade by Governor Gordon Thiessen
  • Parliamentary Bureau of the Ottawa Citizen
  • Kevin Cox, Atlantic Bureau of the Ottawa Citizen