The recent Covid -19 related developments in the Canadian economy have forced the federal government to react in unprecedent ways that cover new fiscal measures such as CERB, CRB, CEWS, etc. As a result of these massive spending, several studies have begun sounding the alarm pointing out a very narrow path Ottawa will need to walk to keep the country's deficit and debt on a sustainable trajectory.

(A)Discuss what is meant by debt/ deficit sustainability, as mentioned above.

It has also been indicated that even with the massive spending of the past seven months, the federal government's finances are still in solid enough shape, as portrayed by the ratio of net federal debt to gross domestic product below:

Parliamentary Budget Officer

Fiscal year Debt to GDP ratio

2019-2020 31.3

2020-2021 47.9

2021-2022 48.1

2022-2023 48.3

2023-2024 48.2

2024-2025 47.8

2025-2026 47.3

The same studies have however pointed out that for the time being there are several factors that appear to be in Ottawa's favour projecting falling debt (or deficit) GDP ratio, indicated above.

(B)Your task in this part is to discuss the role of the following factors in explaining the above optimistic projections:

(i)economic growth,

(ii)interest rates,

(iii)emphasis on infrastructure spending, and

(iv)the participation rates in the labour force.