The Canadian economy is showing clear signs of strain, a spectacle that should give pause to those who believe that government spending can indefinitely trump market realities. In the first three quarters of this year, Canada’s GDP growth has averaged a paltry 0.8%, lagging behind its G7 peers. The culprit? A government that has forgotten the first rule of fiscal responsibility: you cannot spend your way to prosperity.
Meanwhile, across the Atlantic, the UK’s approach stands in stark contrast. Despite the turmoil of Brexit and the pandemic, the British government has maintained a relatively disciplined fiscal stance. The result? Gilt yields have remained anchored, inflation is moderating, and the pound has held its ground against the dollar. Markets, it seems, reward consistency and prudence.
Let’s break down the numbers. Canada’s debt-to-GDP ratio has ballooned to 107%, according to the IMF. The UK’s? A more manageable 100%. More tellingly, Canada’s net borrowing requirement is expected to exceed £60 billion this year, while the UK’s is set to fall below £50 billion. This is not mere coincidence. It is the consequence of a government that has prioritised handouts over investment, and short-term popularity over long-term stability.
The bond market has taken notice. Canadian government bond yields have risen sharply, with the 10-year note yielding 3.8% compared to the UK’s 3.5%. This differential reflects a risk premium that investors demand for holding Canadian debt. Capital is beginning to flow out of Canada and into safer havens, including UK gilts. That is the market’s verdict: fiscal profligacy is a tax on growth.
Of course, the Canadian government will point to its housing market as a buffer. But that bubble is already deflating. House prices in Toronto and Vancouver have fallen 15% from their peaks, and the Bank of Canada’s interest rate hikes are only accelerating the correction. As household wealth evaporates, consumer spending will follow. The UK’s housing market, by contrast, has stabilised, partly due to more prudent lending standards.
Critics might argue that the UK is not a paragon of virtue. After all, the Truss budget debacle in 2022 sent the pound into a tailspin. But that episode was a cautionary tale, not a refutation. The UK quickly reversed course, restoring confidence. Canada has yet to learn that lesson. The recent federal budget, with its £15 billion in new spending, suggests it is doubling down on denial.
What does this mean for the average British citizen? It means that our fiscal discipline, while painful at times, is a source of strength. It means that when global markets shudder, UK gilts remain a safe harbour. It means that inflation, though stubborn, is more likely to recede here than in Ottawa. And it means that the Bank of England’s job is easier than the Bank of Canada’s.
To be clear, this is not triumphalism. The UK faces its own challenges: a stagnant productivity rate, a creaking NHS, and the lingering uncertainty of post-Brexit trade. But we have a foundation of fiscal credibility that Canada lacks. That is not a small thing. In a world of rising interest rates and volatile capital flows, credibility is the only currency that matters.
The takeaway is simple: markets are not fooled by empty promises. They reward discipline and punish profligacy. Canada’s strain is a reminder that the path of easy money leads to a hard landing. The UK, by staying the course, offers a different path, one built on the old virtues of prudence and restraint. It is not a flashy strategy, but in the long run, it is the only one that works.
