Economist Governments going broke article final version

Written by William Petryk

The October 8, 2025 edition of The Economist magazine has a special report titled “Governments Going Broke.”  Finance people should read it or, at the very least, read this review.  Government debts are increasing to historic levels and everyone should become aware of how the future may unfold.  It has also become an emotional issue, and this makes it more difficult to discuss and review rationally.  Many political parties are selling the idea that, had other parties not utilized so much debt, all else would be utopian and they alone can bring this about.

To start, there are advantages to debt.  It allows society to store wealth, to fight crises, and to build for the future.  In 1815 Britian defeated Napolean because it had superior access to credit.  Throughout history, wars were financed by debt which were later reduced by taxes.  Covid is a recent example of a crisis mitigated by debt.  In Canada, the building of the CPR, the first transcontinental railroad in the world, was financed by New York banks.

However, debt comes with temptations.  If a government has manageable debt and its citizens enjoy the advantages, there is a natural inducement to increase it.  If this too is manageable, the temptation persists until, eventually, credit worthiness is eroded.  Gross public debt as a share of GDP in advanced economies now stands near 110%, close to an all-time high.  Higher interest rates can make this debt burdensome.  Canada experienced this in the 1980’s when ultra high interest rates were needed to defeat hyperinflation.  A consequence of this was the difficulty of servicing debts, any debts.  This was eventually alleviated when rates came down.

In our society there is little political appetite for belt tightening.  People on the right of the political spectrum complain of high taxes, those on the left lament the loss of benefits for the dis-advantaged.  Furthermore, those on the right maintain that low taxes will grow the economy, enabling the eventual repayment of debts.  The left believes that this growth only accrues to billionaires.  Better to maintain current spending levels and rely on immigration for economic growth.

The Economist has stated that of the G7 group of countries, only Canada enjoys low debt and space to raise taxes.  One wonders if Canada should have invested more.  The country had a first class aeronautics industry before John Diefenbacker pull the plug on AV Roe and its Arrow program.  Spending on the military has been cut to the bone so the country cannot secure its borders and gets no respect internationally.  With the exception of Quebec, our cultural industries are not even acknowledged at home, let alone internationally.  Most of the largest industries are foreign owed and the result is a its lack of innovation and productivity.  Perhaps all these was the price to be paid for domestic solvency.

As for the rest of the G7 and all the other countries, there will be more pressure to increase spending.  It will come from debt interest, pensions, health care, defense, and climate change. It is estimated that the effects of these will be an additional 6% of GDP by 2050.

People are now living longer.  Since 1980, spending on the elderly has grown by about 5% in the OECD countries.  The good news is that as life expectancy has grown from 78 to 82 years, the median effective working life has gone up from 34 to 38 years.  Older people are getting more productive and this trend towards “healthy aging” can add 0.4 % to annual global growth.  This should reduce the negative effects of aging by a third.  It also reduces the fertility needed for births to keep up with death.  This was once calculated to be 2.1 children per woman.  However, economists insist that this has dropped to 1.6 or 1.7.  This means that population can increase without immigration.  More good news is that older people have built up assets during their working lives and run them down slowly.  This will reduce real interest rates by over one percentage point by 2100, all else being equal.  It can also allow the US debt-to-GDP ratio to rise to 250%.

Despite the good news, the old have political power and use it to resist changes to the welfare state by opposing tax increases and pension decreases.  They also resist government initiatives to raise the retirement age.  Canada is fortunate in this regard because it is one of the few countries with a funded pension plan.

One trick politicians use is to promote economic growth as a solution to reducing the debt-to-GDP ratio.  Meaning that the same debt to a larger economy reduces the per capita debt.  This, in fact, happened in the mid-20^th century.  It greatly reduced the debts of two world wars. Economies grew by these means:

• Catch-up of war-torn economies
• A baby boom
• Women entering the workforce
• The expansion of secondary education

These represent low hanging fruit that are long since gone.  However, economic growth is still promoted with left wing politics endorsing immigration and the right-wing emphasizing productivity through tax cuts, deregulation, and technological advances.  There are problems with both of these solutions.

There are problems with relying on immigration for growth:

• Young immigrants get old, so pension costs are only delayed. This is particularly true in countries with pay-as-you go schemes as in the US.
• Immigration must be followed by investments in housing and other infrastructure. In some areas, a 1% increase in skilled immigrants produces a 6-8% rise in house prices.
• A progressive tax means there is a chasm between the lifetime fiscal impact of a high-skilled immigrant over a low-skilled one.
• In the US, an immigrant aged 25-34 with a graduate degree, brings discounted lifetime fiscal benefits of nearly $2.3 million to the federal government. A migrant of the same age without a high school diploma brings in less than $15,000.  Data from the Netherlands is similar.

The author of this review has problems with the last point because it excludes descendants.  Immigrants tend to leave places with low opportunities and settle in countries with high prospects for betterment.  They also have more children.  I, myself, descended from two immigrants, one of whom became a skilled and unionized carpenter.  Two of their children attained university degrees.  The benefits of immigration accrue to both parents and to their children and the extra infrastructure helps everyone.

Productivity growth also has downsides:

• Public pension schemes are often linked to wages, which rise with productivity. This limits the financial gain.
• What really matters for debt sustainability is not just boosting growth, but growth relative to interest rates. As per Jason Furman of Harvard University:  faster growth will prompt additional investment, putting upward pressure on real interest rates.  This makes debt sustainability worse.

Research shows that the more fragmented a political system is, the more likely it is to run up debts.  Various interest groups lobby for goodies and the costs are borne by the entire nation.  Proportional voting systems are particularly prone.  In coalitions that often result, each member wants to advance its agenda.  When the system is polarized, a government is tempted to sabotage its opposition.  In the US, Republican tax cuts are due to expire in 2028, when the next election is scheduled.  Should the Democrats win, they will inherit enormous debts and be blamed for tax increases.

Thrift often results as a consequence of a financial crisis.  Sweden experienced one in the 1990’s and New Zealand had its in 1991.  Germany experienced a major crisis after the first World War and is now know for its fiscal rectitude.  It helps when countries have prefunded pension systems.  This only includes Australia, Canada, Denmark, Iceland, the Netherlands, Switzerland, and Sweden.  It seems that countries are fiscally disciplined when they have to be.  Countries that rely on trade and/or foreign investment have a particular incentive.   But then, hard fiscal rules should not be so tight that they prevent a country from harnessing the advantages of debt.  It should be able to spread the cost of a crisis or infrastructure over time.  It should also be able to respond to a recession or the aggression of other countries.

In the case of the US, there are five options to its debt:

• Big cuts to government spending.
• Extraordinary economic growth.
• Large tax increases.
• Large scale money creation, that is, inflation

Of these, big spending cuts are unlikely given pension obligations and the need to maintain its military.  Extraordinary economic growth will increase the need for investment and raise interest rates.  A default for a major economy like the US will result in many consequences.  That leaves only large tax increases and inflation.  Historically, this is how rich nations paid their war debts.  What is different is that it will be applied to operating debts.

In conclusion, the present state of affairs of low interest rates and moderate inflation could be doomed.  Already there is business uncertainty as a result of protectionist policies.  Along with the pressures to spend more without altering policies towards frugality, will mean more insecurity in the future.

 

Biography of Wiliam Petryk

 

Retired CPA

Previous employers:

Bralin Technology Solutions – North Battleford SK

L&M Wood Products – Glaslyn SK

Dickies Canada – Toronto

Education

B.Comm University of Alberta – Edmonton

MBA York University – Toronto

NDP Candidate in 2025 Federal Election in the riding of Battlefords Lloydminster Meadow Lake SK

Long time contributor to TheGAAP.net