For centuries, alchemists have claimed they could transform lead into gold, yet they repeatedly failed. Despite being debunked, these individuals often rebranded their discredited schemes, enticing new generations of hopeful individuals seeking miraculous results. In a modern twist, Mark Carney, a prominent figure in today’s economic discussions, is likened to these historical alchemists. He proposes converting deficits into “investment,” echoing a long-standing promise from the Trudeau administration, now presented with new slogans like “spend less and invest more.” This rhetoric resembles Justin Trudeau’s earlier assertion that “the budget will balance itself,” suggesting that deficits would somehow generate enough economic growth and tax revenue to balance the budget.

The Liberal government has reiterated this promise, especially following the COVID-19 pandemic, introducing the concept of a “Great Reset.” This initiative aims to modernize the economy through substantial debt-fueled investments. However, the results over the past decade have been concerning. Canada’s national debt has doubled, while real investment per worker has decreased by over 10%, marking the steepest decline among G7 nations. Furthermore, Canada has recorded the weakest per capita GDP growth in the G7. In 2024, investment per worker in Canada stood at $15,600, significantly lower than the $28,600 in the United States and below the OECD average of $23,600.

The question arises: why have deficits not led to increased investments? Economists argue that all economic activity stems from existing resources; nothing is created from nothing. Governments can acquire debt either by borrowing or printing money. Printing money can lead to inflation, while borrowing can absorb funds that would otherwise be available for private investment. Consequently, every dollar the government injects into the economy through deficits is essentially borrowed from it, resulting in a shift from productive investments—such as factories and technology research—to unproductive government spending. This phenomenon is known as the crowding-out effect.

A historical example from the 1990s illustrates this point. Israel faced significant deficits, which forced the government to offer high interest rates on bonds, attracting pension and insurance funds to invest in these secure securities. This situation stifled private investment. However, as detailed in the book "Start-Up Nation: The Story of Israel’s Economic Miracle," when Israel reduced its deficits and ceased bond sales, investors redirected their funds into innovative businesses, leading to a surge in venture capital and establishing Israel as a leader in start-ups and Nasdaq-listed companies.

Additionally, current deficits are likely to result in future tax increases. When businesses and individuals observe substantial government deficits, they often reduce their spending and investment in anticipation of higher taxes. This concept, known as “Ricardian equivalence,” suggests that deficits can lead to decreased private consumption and investment. A 2019 study by the International Monetary Fund confirmed that in high-debt countries like Canada, deficits encourage households to save more and spend less, negating any potential stimulus effects.

Carney argues that government borrowing from the private sector can facilitate significant state-directed economic investments that yield higher returns. This raises two critical questions: if a project is economically viable, why would the government need to finance it? Conversely, if it is not viable, why would the government choose to fund it? Large infrastructure projects, such as ports and pipelines, can secure loans and investments from the vast pool of private capital available.