As Canada invests and builds, is anyone keeping an eye on the piling debt?

Serge Dupont is senior adviser and head of public policy at Bennett Jones and a former federal deputy minister.

Edward Greenspon is former president of the Public Policy Forum and former editor-in-chief of The Globe and Mail.

In his Aug. 22 remarks to Canadians on the breakdown in trade talks with the Trump administration and again in last week’s Forward Guidance video, Prime Minister Mark Carney vowed to “go further to make Canada one of the most competitive and attractive places in the world for businesses and strategic sectors to invest, build and grow.”

A thrust to diversify and grow our economy and a more active government role is on full display at this week’s Canada investment summit.

In this moment of global disruption, great power rivalry and technological upheaval, countries around the world are busily deploying a universe of industrial policy tools. This is because markets alone are ill-equipped to navigate a rising tide of challenges to core priorities such as: National security, sovereignty, reliability of supply chains, energy security and the response to climate change.

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The same is true for trade diversification. The gravitational pull of our economy, even with tariffs, remains north-south. To reorient our trade and facilitate adjustment, industrial policy tools are indispensable.

Industrial policy, though, comes with an often-unacknowledged fiscal cost. Tax credits or direct aid to businesses and workers have a one-to-one impact on the budget deficit. The financing of businesses or public investment in large projects by the Canada Infrastructure Bank, the Canada Growth Fund or the proposed Canada Strong Fund are not budgetary expenditures, but they do require public borrowing. This arises as Canada and its allies are also vastly expanding borrowing to fund rising defence commitments.

There is a serious complicating factor at play. International bond markets are showing signs of nervousness over global inflationary risks and the rapid growth of public debt in the United States and worldwide. Correspondingly, it is costing more for governments to borrow. The government of Canada now pays an interest rate of just over 4 per cent on a ten-year bond, compared with about 1.5 per cent before COVID-19.

The Prime Minister is right to affirm that Canada has the strongest fiscal position in the G7 and that focus and discipline must be maintained because when financial markets lose confidence, it happens suddenly. This was perhaps a veiled warning for the United States that has no plan to deal with its government debt now exceeding US$40-trillion, but it is also a reminder that Canada can once again be caught in a storm. To keep the confidence of bond holders, but critically also to attract the equity investors needed to transform our economy, an orderly fiscal house is vital.

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The question is not whether industrial policy, but how industrial policy. Public intervention and borrowing must be directed at growing the capacity and resilience of the economy. Interventions should be transparent to taxpayers and to markets.

It is said that governments are not good at picking winners. True but not particularly helpful. The market is generally the best and most dynamic mechanism to allocate capital resources. But fiscal support is instrumental to mobilizing the private capital required to accelerate sovereignty-enhancing, nation-building projects, physical and digital. Creative forms of public financing can lower capital costs or mitigate risk for enterprises to deliver the necessary hurdle return rate for private investors.

Recent announcements such as the West Coast pipeline project and the hydro and wind resource development in Labrador rightly struck positive notes across the country. Yet details of the pledged public support, amounting in each case to a mix of tax credits and public investments in the tens of billions of dollars, remain scant. In time, it will be necessary to explain the structure, expected returns, and risks of the investments.

Because of the risks, execution of the investments will be key. Delivering projects on time and on budget is necessary to meet both the public and the private interests. We can ill-afford large cost overruns, particularly if underwritten by the Crown.

Finally, we should be able to report clearly on the results of public interventions and the returns on the public investment. In his first visit to the White House, Prime Minister Carney told U.S. President Donald Trump that he had been out talking to the “owners of Canada” and heard clearly that the country is not for sale. As we invest in building the country instead, those owners have a right to stay informed. And if we are to finance these nation-building investments at the most affordable price, investors and lenders have to be clear at all times on Canada’s plan and how we are executing on it.

First the investment summit and then the budget are the places to start.