Who Will Pay for the Economic Lockdown?

The global economic lockdown implemented to contain the COVID-19 virus has caused the most severe economic downturn in Canada since the Great Depression in the 1930s. However, while production plummeted, the overall income of Canadians fell much less because of the federal government’s aggressive debt-financed policy response. Most of the current discussion around the additional debt focusses on its sustainability -- whether the debt can be rolled over indefinitely without requiring tax increases or spending cuts to finance the interest expense. The economic cost of the debt gets much less attention in the policy discussions. The implicit assumption appears to be that very low interest rates mean that the debt can be rolled over indefinitely without imposing any economic costs – the Canadian economy is dynamically inefficient. However, calculation of the net cash flow from investment by the corporate sector indicates that the Canadian economy was dynamically efficient over the 30 year period ending in 2019. Rolling over the lockdown-related debt would therefore have an economic cost. The income loss arising from the recession can only be deferred, not eliminated, by issuing debt. Since the benefits of the economic stabilization policies accrue to persons alive today, the lockdown-induced increase in debt should be retired before the next generation starts working and paying taxes. A second fairness issue explored in the paper is how the recession-induced output loss should be shared among the current generation.