The economic news from Canada is grim. The latest GDP figures show a contraction of 1.2% quarter on quarter, and the unemployment rate has climbed to 7.8%. Inflation, though easing, remains stubbornly above the Bank of Canada’s target at 4.5%. The root cause? A decade of profligate spending, now coming home to roost. The federal deficit has ballooned to 8.3% of GDP, and the national debt is soaring. Investors are voting with their feet: capital flight is accelerating, with net outflows of CAD 15 billion in the last quarter alone. The loonie has plummeted 12% against the dollar this year, and the yield on 10-year Canadian government bonds has spiked to 5.2%, reflecting a risk premium that wasn’t there a year ago.
Contrast this with the UK. Despite the post-Brexit turmoil and the energy price shock, the British government has stuck to its fiscal guns. Chancellor Rachel Reeves has committed to fiscal rules that aim for a balanced budget by 2027. Public spending growth has been capped at 2% a year in real terms, and the tax burden, while high, is being used to cut the deficit, not fund new handouts. The results are clear: UK GDP grew 0.4% in the last quarter, inflation is at 3.2% and falling, and the 10-year gilt yield is a stable 4.2%, well below Canada’s. The pound has held its ground against the dollar, and foreign investment has actually increased by 3%.
This is not an accident. It is a direct consequence of fiscal discipline. The market is a harsh but fair arbiter. It rewards prudence and punishes recklessness. Canada’s policymakers, from Justin Trudeau to the Bank of Canada, have been living in a fantasy land where deficits don’t matter and debt is free. They have learned the hard way that there is no such thing as a free lunch. Every dollar borrowed must be repaid, with interest. And when markets sense that a government is losing control, they demand a higher premium to hold its debt. That is what we are seeing in Canada today.
The UK, by contrast, has earned its credibility. It took the pain of austerity after 2010, and while it was politically unpopular, it laid the foundation for stronger growth. The current government has continued that tradition, albeit with a more moderate approach. The result is that the UK is now seen as a safe haven in a world of rising risks. Pension funds, sovereign wealth funds, and other institutional investors are piling into gilts, not Canadian bonds. This is the ultimate vote of confidence.
But let’s not get complacent. The UK still faces challenges: a sluggish productivity rate, an ageing population, and the lingering effects of Brexit. The structural deficit is still too high for my liking. The government must continue to resist the siren calls for more spending, especially from the left wing of the Labour Party. Every additional pound of borrowing will erode the credibility we have built.
Canada’s crisis should serve as a wake-up call to all governments. You cannot spend your way to prosperity. You cannot borrow your way to growth. The piper must be paid, and the markets will ensure it. The UK has chosen the path of fiscal rectitude, and it is being richly rewarded. Let us hope our leaders have the stomach to stay the course.
