Why supporting lower government debt could boost productivity in Canada

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A recent study written by Professor Ergete Ferede examined the link between Canada’s rising government debt and its declining labour productivity, a critical driver of economic growth and living standards. Post-COVID-19, Canada’s general government gross debt-to-GDP ratio surged by 28 percentage points from 2019 to 2020, the highest increase among G7 nations, placing Canada 7th among 38 advanced economies for debt ratio. The study finds that reducing this ratio by ten percentage points boosts labour productivity growth by approximately 1.04%. If Canada gradually lowers its debt-to-GDP ratio to pre-pandemic levels over five years, labour productivity could rise by 1.6%, increasing output per hour worked by $1.01 and potentially raising the average employee’s annual income by about $2,100 (inflation-adjusted) for a 40-hour workweek. The study recommends curbing deficit-financed spending and adopting credible fiscal anchors to manage debt and reverse productivity slowdown. Long-term debt reduction supports a healthier economic environment, benefiting all sectors by enhancing productivity and growth. Small businesses gain from increased consumer demand and lower borrowing costs, while industries benefit from enhanced competitiveness and economic stability.

Here is the link to the study: https://www.fraserinstitute.org/sites/default/files/2025-06/impact-of-government-debt-on-labour-productivity-in-canada.pdf