For anyone who might be under the impression that the federal government has been on a debt-fuelled spending spree over the last decade, the Liberals have a message in the 2025 budget – Don’t worry, nothing to see here.
In the opening pages of the budget, the government makes the bold-type claim that Canada has the lowest net debt among G7 nations. A few dozen pages later, the government gives a 30-year projection of the federal debt burden that shows a smooth decline over time. So, nothing to get excited about, right?
Not quite. The picture the government paints is not inaccurate, but it is, at a minimum, incomplete. There are many reasons – and at least three ways – to worry about Ottawa’s rising debt.
1. Net debt doesn’t tell the whole story
Canada looks like a paragon of thrift, according to the chart in the first page of the budget, and replicated below. General government debt as a percentage of gross domestic product is just 13.3 per cent, far lower than any of the other G7 industrialized countries. (General government debt includes not just federal, but also provincial and municipal borrowing.)
On the measure of general government net debt, Canada does emerge as a clear leader, just as the Liberals brag in the budget.
But there is a very large caveat. The net debt calculation includes not just liabilities, but assets. And in Canada’s case, that includes hundreds of billions of dollars in public pension investments held by the Canada Pension Plan and the Quebec Pension Plan. Those assets have been built up through excess contributions, and investment returns, with the aim of providing funds for future pension payouts.
There’s no subterfuge at work: those assets exist, and should be counted in any reckoning of net general government debt. But those assets are not accessible to Ottawa in the way that other assets, such as real estate, would be. For one, the CPP is jointly administered with the provinces (the QPP of course is managed within Quebec). More pointedly, the entire reason for the pension investment funds existing is so that they are available to fund future pensions. If Ottawa were ever to tap CPP assets – an extremely unlikely scenario – Canadians would face some combination of higher annual contributions or smaller pensions.
Setting aside that extreme hypothetical, there is a very real distortion resulting from the net general government debt measure. If general government gross debt is used as a measure, Canada does not perform nearly as well, as this second chart shows.
Under this measure, Canada gets a bronze-medal ranking, with Britain and Germany recording a lower debt burden, as measured by gross general government debt as a percentage of GDP. (However, German workers and businesses pay substantially more in annual pension contributions.) With the effect of pension-fund holdings and other assets excluded, Canada’s debt picture is not nearly so rosy.
That effect has been growing over time. Beginning around the turn of the century, the federal and provincial governments agreed to boost pension contributions so that excess funds could be hived off, and grow through investments. That decision has helped to ensure the long-term stability of public pensions in this country.
And during that time, the gap between Canada’s gross and net general government debt has been widening, as this third chart makes clear. Pension assets aren’t the only reason for that gap, but they are a big part of the explanation.
Thirty years ago, net general government debt was just under two-thirds of the gross measure. This year, net general government debt is less than 10 per cent of the gross measure. Any evaluation of Canada’s debt position over time needs to take into account the growing gravitational pull of public-pension assets.
Open this photo in gallery:
Former Prime Minister Justin Trudeau and former Finance Minister Bill Morneau arrive to deliver the federal budget in the House of Commons on March 22, 2016. In fiscal 2016, the first year in power for the Trudeau Liberals, debt servicing charges were $21.8-billion.Sean Kilpatrick/The Canadian Press
2. Debt charges account for a larger share of federal spending
Still not worried? Then you might want to consider how much Ottawa is spending each year on servicing the federal government’s debt. In dollar terms, the rise has been breathtaking. In fiscal 2016, the first year in power for the Trudeau Liberals, debt servicing charges were $21.8-billion. The federal government projects that in fiscal 2030, it will spend $76.1-billion on public debt charges.
At that point, Ottawa projects it will spend more servicing debt than it does on the Canada Child Benefit ($33.4-billion), provincial and territorial equalization payments ($37.1-billion) or even health-care transfers ($67.5-billion).
Public debt charges are the fastest growing expense for Ottawa, by far, outpacing even the growth in (what the budget calls) “elderly benefits” such as Old Age Security payments. As a result, the share of spending eaten up by debt charges is rising fast, as this fourth chart shows.
By 2030, debt charges will eat up nearly 12 cents of each dollar that Ottawa spends, up from a nadir of 3.2 per cent in fiscal 2022, when interest rates were at rock bottom. Historically speaking, even the 2030 levels aren’t that high. As recently as fiscal 2008, debt charges accounted for a higher proportion of spending. And they were much higher in 1997, when nearly 30 cents of each dollar spent went to public debt charges.
But the trajectory also matters. By 1997, Ottawa had set in place sweeping fiscal reforms that would put the budget into surplus within a year. The share of spending devoted to the debt burden started to shrink rapidly.
The Carney Liberals have touted their own version of fiscal retrenchment, but the government is not projecting any return to surplus over the forecasting horizon of the budget. Instead, the share of spending on public debt charges only goes up.
Open this photo in gallery:
Prime Minister Mark Carney and Finance Minister Francois-Philippe Champagne make their way to the House of Commons for the tabling of the federal budget on Nov. 4.Justin Tang/The Canadian Press
3. In the long run… who knows?
The medium-term forecasts for Ottawa’s debt burden may be somewhat worrying, but the forecast for decades hence is downright dizzying. The fall budget presents what should be a comforting outlook, with the federal debt burden (net federal debt as a proportion of gross domestic product) declining through to 2056.
Phew! Except for one small problem, as this final chart makes clear. The 2024 Fall Economic Statement, tabled last December, had a similar chart – with a much rosier forecast.
A year ago, the government said net federal debt was projected to fall to just 2.6 per cent of GDP by fiscal 2056, down from 42.1 per cent in fiscal 2024. Eleven months later, that forecast had changed significantly. Now, the debt burden is projected to fall far more slowly, declining to just 37.2 per cent by 2056.
Such long-term forecasts can be swayed by relatively small changes. In this case, higher debt levels in the early years, a 10-basis point (0.1 percentage points) increase in long-term interest rates and lower estimates for population and workforce growth lead to the much-changed outlook in Budget 2025. Still, the debt burden is declining, even if at a slower pace. All is well, right?
Open this photo in gallery:
Don Drummond delivers the “Drummond report,” a 2012 review of Ontario public services which made recommendations for widespread reform with the goal of eliminating the provincial deficit by 2017-18.Fred Lum/The Globe and Mail
But that is not the end of the matter. Economist and former senior federal finance official Don Drummond points out that Ottawa’s debt burden has grown high enough that the federal budget is increasingly vulnerable to small shifts in interest rates.
Mr. Drummond says his calculations indicate that a one percentage point increase in average effective interest rates to 4.3 per cent, beyond the 3.3 per cent that Ottawa forecasts, would have a major impact. Under that assumption, federal debt would reach 48.5 per cent of GDP in 2056 – more than 11 percentage points higher than the budget forecast. Even more worryingly, that would mean the federal debt burden would rise in the next three decades.
This is not a fun-with-numbers exercise. Mr. Drummond’s number is more plausible. Ottawa’s outlook for long-term interest rates is lower than the projected growth in nominal GDP. That’s the inverse of historical patterns; interest rates have generally been higher than the growth in nominal GDP. Mr. Drummond’s assumption is more in line with those long-term trends.
And he notes that there are known spending commitments, most notably for defence, that are not reflected in Ottawa’s current fiscal framework. Without tax increases or offsetting cuts to spending, meeting those commitments will further add to the debt burden.
Those are the known unknowns. Add to that the possibility of future recessions, the costs of climate change or even greater disruptions, and the debt picture could deteriorate dramatically.
Without a commitment to stabilize Canada’s debt load in the short term, that vulnerability will only grow. And at some point, Canadians will find out just how worrying today’s debt should have been.
The Sunday Editorial
Alberta’s (welcome) healthcare heresy
The airport of the future has arrived – but its landing is delayed in Canada
The Carney Liberals arrive at a fiscal fork in the road
