Most developed countries in the world are increasing their spending and debt. Most governments will not stop their excessive spending until they are forced to do so. This happens because they cannot sell their debt (e.g., Canada Savings Bonds, Government of Canada bonds, provincial government bonds, crown corporation bonds, t-bills) without paying substantially higher interest rates. Once they are required to pay higher interest rates they can no longer afford the interest on the debt. Therefore, they will have to slash spending, raise taxes, or both.
Western Europe, Japan, United States and Canada are in imminent danger of having to pay higher interest rates on their debt. This will start a downward spiral of their economies, which will lead to a recession. Some people think parts of these economies have been in a recession since 2008. A recession is falling Gross Domestic Product (GDP) and higher unemployment. Governments usually try to counteract this by increasing spending and lowering short term interest rates. Unfortunately (or fortunately), the governments will not be able to increase spending because of the debt, and interest rates can’t really go much lower. Canada and the rest of the developed countries are going down the same road as Greece, Ireland, and Portugal. See our article on Debt in Selected Countries.
Recessions are a normal part of the business cycle, but if we go into a recession now because of sovereign debt, it may be long and nasty. You can’t really tell when a recession begins or ends until probably five years after it’s over. We entered a recession in 2008, but at this point we can’t really tell if the recession ended in 2010, or if it is a double-dip recession that we are still in.
What can you do?
The most important thing you can do is reduce your debt, especially debt on which the interest is not tax-deductible. You can also lobby your governments (federal, provincial and local) to eliminate the deficit, reduce debt, and become better managers of your money. You can do this by contacting your Member of Parliament (MP), provincial and local government representatives. For a limited time, you can provide input to the Federal government through the online pre-budget consultations. You could also sign petitions that are on the Canadian Taxpayers Federation website.