Canadian public debt

Canadian public debt, or general government debt, is the liabilities of the government sector. Government gross debt consists of liabilities that are a financial claim that requires payment of interest and/or principal in future. They consist mainly of Treasury bonds, but also include public service employee pension liabilities. Changes in government debt over time reflect primarily borrowing due to past government deficits (where a deficit occurs when government expenditures exceed revenues).

For 2020 (the fiscal year ending 31 March 2021), the market value of gross debt, was $2,852 billion ($74,474 per capita) for the consolidated Canadian general government – federal, plus provincial, territorial and local governments (PTLGs) combined. As a ratio of GDP, gross debt was 129.2% (GDP was $2,207 billion in 2020), the highest level ever recorded.

The sustainability of government debt depends on sound fiscal management by the provincial, territorial and local governments (PTLGs), given that Canada is one of the world's most decentralized federations. Approximately half of Canadian general government gross debt in 2020 was debt of the federal (central) government ($1,466.0 billion or 66.4% of GDP), and half was debt of the PTLGs. Public debt is sustainable when it "does not grow continuously as a share of the economy". While the federal government's fiscal strategy was assessed as sustainable over the long-term, this was not the case for the subnational sector as a whole, according to a 2022 PBO report.

General government net debt, or gross debt minus financial assets, reached $1,560 billion or 70.7% as a share of GDP in the fiscal year ending 31 March 31 2021. This compares to 55.1% the year previously. The rise in net debt is mainly attributable to the rise in federal government net debt, which rose to $942 billion, or 42.7% of GDP, from 29.8% in the previous year.

During the COVID-19 pandemic, with interest rates historically low, deficit spending cost less to finance. Compared to 1995, when interest levels reached an historic high, and interest payments on debt represented about 6% of the GDP, in 2021, interest payments represented 1% of the GDP. Starting at the end of 2019, Canada's national net worth increased by more than $5.1 trillion, to a total national net worth in the second quarter of 2022 of $17,6 trillion. In the second quarter of 2022, the GDP implicit price index reached its highest level in 50 years.

As of March 2022, Canada's DBRS AAA federal credit rating was maintained.

Alternative measures of government debt

Commonly-used government debt terms are gross debt, net debt, and debt securities liabilities. These measures are often presented as a share of GDP, as in the table below, to gauge the size of debt relative to the size of the economy. The debt-to-GDP ratio is a key indicator of the sustainability of government finance, according to the OECD.

Gross debt, also called "total debt", consists of all liabilities that require payment of principal or interest at some point in the future. Gross debt is the commonly-used measure of debt in international comparisons by the IMF and the OECD.

Net Debt is gross debt minus financial assets. It takes into account the financial assets governments hold, such as investments to cover the liabilities associated with civil servants' (government employee) pension plans. An issue with calculating net debt is that some government assets are difficult to value. Examples of difficult-to-value assets include nonmarketable equity investments, and loans that might never be repaid if the loan-receiving firms become insolvent. Another issue with net debt is which government assets should be included. The Department of Finance's method to calculate net debt has been criticized for including the assets (but not the liabilities) of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP). Yakabuski and Clemens and Palacios argue that the Department of Finance methodology understates net debt, since CPP and QPP assets are set aside to pay for future public retirement plan benefits, so they are not available to also pay down government debt.

Debt securities liabilities are liabilities in the form of debt securities (chiefly bonds and bills.) Government debt securities provide a useful measure of government debt as they are a large share of government debt (76.2% in 2020), and are relatively straightforward to measure. By contrast, the second largest debt component, employee pension plan liabilities, are less easy to value as they depend on employee longevity and the pension plan investment returns over many years. Debt securities can be valued at book value or at market value. The value of a debt security measured at market prices is most relevant for a purchaser (price varies with changes in market yields). However, the book value (also called the "nominal value") is more relevant for a government issuing a security because the book value indicates the amount owing to the creditor at any moment. In 2020, the book value of debt securities liabilities for the consolidated Canadian general government was approximately 6% lower than the market value ($2,057 billion compared to $2,172 billion), while federal government debt securities liabilities were about 3% lower ($1,125 billion vs. $1,165 billion.)

Government Debt for fiscal year 2020.	Amount ($billions)	Percent of GDP
Consolidated general government:
Gross debt	$2,852	129.2%
Net debt	$1,560	70.7%
Debt securities liabilities	$2,172	98.4%
Federal government:
Gross debt	$1,466	66.4%
Net debt	$942	42.7%
Debt securities liabilities	$1,165	52.8%

Notes: Data are for 2020 (the fiscal year ending 31 March 2021). The consolidated general government includes all federal (central), provincial, territorial and local governments. Debt is measured at market value. GDP in 2020 was $2,207 billion.

Sources: Statistics Canada, The Daily, Statistics Canada Tables 10-10-0147-01, 10-10-0016-01 and 36-10-0222-01.

Historical context

Overview During the Great Depression—a severe global economic depression from 1929 to 1939—the Canadian consolidated general government gross debt as a share of GDP exceeded 100%. It reached 150% following World War II. The ratio fell until the 1970s, then rose to over 100% in the mid-1990s. The federal government's gross debt to GDP ratio fell from the mid-1990s, before rising briefly following the financial crisis of 2008-09. It then resumed a downward trend until the pandemic-related spike in 2020. By contrast, provincial government gross debt as a share of GDP has increased fairly steadily since the 1960s.

Government bond issues soared in 2020 to finance COVID-19 related spending, as shown in the figure below. As a consequence, by the third quarter of 2020, the ratio of all government debt securities liabilities to GDP jumped to 95.3%, surpassing the 1995 peak of 93.7%.

Source: Debt securities liabilities (book value) for the "Federal general government" and "Other levels of general government," (Q4 except Q3 for 2020) are from Statistics Canada, Table 36-10-0580-01, National Balance Sheet Accounts for 1990 to 2020; and "Short-term paper" plus "Bonds," Table 36-10-0534-01 National balance sheet, provincial and local governments, annual, 1961-2011 and Table 36-110-0533-01, National balance sheet, federal government, annual, 1961 – 2011 for 1961 to 1989.  GDP is from Statistics Canada, Table 36-10-0104-01 Gross domestic product, expenditure-based, Canada, quarterly (Gross domestic product at market prices, at "current prices," converted to annual by summing the Unadjusted value over the 4 quarters of each year).

The Fiscal consolidation of the 1990s Successive years of federal budget deficits in the 1980s and early 1990s, and a rising debt to GDP ratio, led to concerns about debt sustainability. The federal government's deficit reached 8% measured as a share of GDP in 1983 and 1984, and from 1985 to 1990 Canada's public debt increased sharply from $USD166 billion to $USD290 billion with compounding interest accounting for more than 80% of the increase. In 1990, then Prime Minister Brian Mulroney introduced a budget that included a two-year freeze on health care and post-secondary education transfers to the provinces, the elimination of cash grants to businesses, and a 5% cap on spending increases for foreign aid and the military. Plans to privatize Petro-Canada were also announced, a continuation of the privatization program that began in the 1980s which included sales of 23 of Canada's 61 crown corporations, Air Canada, Havilland Aircraft of Canada, Canadian Arsenals, and Connaught Laboratories These measures were expected to decrease the federal deficit from $USD25.3 billion to $USD8.3 billion by 1995.

An editorial in the Wall Street Journal in 1995 said Canada might need an International Monetary Fund bailout and called Canada "an honorary member of the Third World." When Jean Chretien became Prime Minister in November 1993, he undertook a fiscal consolidation that was achieved mainly by big spending reductions. The ratio of spending cuts to tax hikes was seven-to-one. Tax revenues could not be boosted by much partly because Canada's top marginal income tax rate was already around 55%. The policy shift represented "the biggest reduction in Canadian government spending since demobilization after World War Two." By FY 1995-1996 the federal net debt to GDP ratio peaked at 68%, and a budget surplus was achieved within four years.

The Financial Crisis and the COVID-19 Pandemic Since 2007, according to the April 2022 International Monetary Fund's (IMF) World Economic Outlook, Canada has had the lowest net debt-to-GDP ratio in the Group of Seven (G7) nations which include France, Germany, Italy, Japan, the United Kingdom and the United States. In 2022, Canada's net debt-to-GDP ratio was about 33%.

In 2008, the debt-to-GDP ratio was 28% with a total federal debt of $458 billion. In 2010 it was 77%, compared to the United States at 98% and Japan at 227%. During the period that included the 2008 financial crisis and the Great Recession affecting global economies, Stephen Harper's CPC government reported six straight budgetary deficits—$55.6 billion in FY 2009-2010 (-3.6% GDP), $33.4 billion in FY 2010-2011, $18.4 billion in FY 2012-2013, and $5.2 billion in FY 2013-2014, and $1.9 billion in FY 2014-2015 (1.9% GDP). Canada's total federal debt continued to increase after the financial crisis. The debt-to-GDP ratio, increased to 33% in 2013, and then began a slight decline.

During 2020, the first year of the historic COVID-19 pandemic, the sum of all government liabilities (gross debt) reached $2,852 billion (129.2% as a ratio of GDP). The consolidated general government (federal, provincial, territorial and local governments) posted an "historic deficit" of $325.5 billion to provide relief. Issuances of financial instruments in 2020Q2 reached record highs, including an additional $234.4 billion in federal short term paper and an additional $65.7 billion in federal bonds. Borrowing at the subnational level (mostly provincial government bonds) reached $62 billion. By 2022Q2, the GDP increased and the federal government's net debt-to-GDP ratio was 35.4%, down from 36.8% in Q1.

During the pandemic, interest rates were at an historic low which meant that the massive deficit pandemic spending was easier to finance. Interest payments on debt represented approximately 1% of the GDP in 2021, compared to 6% in 1995, when it reached its highest level. By mid-2021, interest payments on public debt for 2021-22 were projected to rise for nine of ten provinces, and for the federal government (from a federal government budgeted $22.1 billion to $35.2 billion).

Public debt of Canadian provinces, territories, and local governments (PTLG)

The total financial liabilities or gross debt of the Canadian consolidated provincial, territorial and local governments (PTLG) was $1,391 billion in 2020 (the fiscal year ending 31 March 2021), as shown in the table below. Net borrowing by the federal government in response to the COVID-19 pandemic, reached a record high in 2020.

The value of provincial outstanding debt securities liabilities varies from 28.7% expressed as a percentage of GDP for British Columbia, to 75.8% for Manitoba.  Debt securities comprise the largest component of gross debt and are relatively straightforward to measure.  (Another major component of gross debt, government employee pension plan liabilities, is more difficult to measure as it varies with a plan's investment returns and member longevity, for example.)

Provincial government gross debt is a substantial proportion of the $2.738 trillion of public debt obligations of Canadians.  At $1.391 trillion, gross debt of the consolidated provincial, territorial and local governments (PTLG) almost equals the federal government's gross debt of $1.426 trillion.  Similarly, the outstanding debt securities issued by the PTLGs, at 44.9% as a share of GDP, is close to the federal government's 51.0% share of GDP.

The July 2022 Fiscal Sustainability Report by the Parliamentary Budget Officer (PBO) said that while the current fiscal policy of the federal government and the Quebec, Alberta, Saskatchewan and Nova Scotia governments was sustainable over the long-term, this was not the case for all provincial and territorial governments. The report is based on a 75-year projection horizon and has assessed that the combination of public pension plans; federal government; and provincial, territorial and local governments are sustainable over that period.

Data for fiscal year 2020.	Gross debt ($billions)	Gross debt as a share of GDP	Debt securities ($billions)	Debt securities as a share of GDP
British Columbia	120.0	38.8	88.6	28.7
Alberta	174.4	59.2	128.3	43.5
Saskatchewan	46.5	59.7	25.8	33.1
Manitoba	68.8	94.4	55.3	75.8
Ontario	507.6	58.6	414.1	47.8
Quebec	407.4	90.7	238.9	53.2
New Brunswick	28.6	76.2	22.7	60.4
Nova Scotia	26.3	56.1	17.2	36.7
Prince Edward Island	3.7	48.6	2.6	34.2
Newfoundland and Labrador	24.8	78.6	16.8	53.1
Consolidated provincial-territorial and local governments	1,391.2	63.0	990.4	44.9
Federal government	1,426.2	64.6	1,124.8	51.0
Consolidated Canadian general government	2,737.6	124.1	2,057.5	93.2

Source: Statistics Canada, Canadian government finance statistics, statement of operations and balance sheet for consolidated governments, Table 10-10-0147-01, https://doi.org/10.25318/1010014701-eng; and Canadian government finance statistics for the federal government, 10-10-0016-01, https://doi.org/10.25318/1010001601-eng.  Gross debt from "Memorandum items, liabilities at nominal value." Debt securities at nominal value is calculated as debt securities at market value - (liabilities at market value - liabilities at nominal value).  Calculations as a percentage of gross domestic product (GDP) are GDP in 2020 at current market prices, expenditure-based, available in Statistics Canada, Table 36-10-0222-01, https://doi.org/10.25318/3610022201-eng.

Data for the provincial governments are consolidated. "Consolidation is a method used to present one overarching statistic for a province that eliminates all transactions and debtor-creditor relationships among different government units within a province." These units include the "provincial government, health and social service institutions, universities and colleges, municipalities and other local public administrations, and school boards". "Consolidated data can be compared across provinces because consolidation takes into account differences in provincial administrative structures and government service delivery".

Consolidated data for the Canadian general government combines federal government data with provincial, territorial and local governments, but excludes data for the Canada Pension Plan and Quebec Pension Plan.

In the table above, debt securities are measured at nominal value, rather than market prices. The nominal value is most relevant to the issuer because it indicates the amount that the debtor owes to the creditor at any moment. In 2020, the market value of debt securities for the consolidated Canadian general government was approximately 6% higher than the nominal value ($2,171.7 billion compared to $2,057.5 billion.)

Provincial debt measurement: Public accounts vs. national accounts measures of debt The Canadian Department of Finance provides measures of federal and provincial debt on a public accounts basis, using reports from individual governments. An advantage of public accounts numbers is that they can provide detail on government expenditures. However, they are not strictly comparable across jurisdictions. By contrast, debt measured on a national accounts basis (employed above) follows an internationally-agreed standard, in order to facilitate comparisons across countries and provinces. As an example of how the public accounts and national accounts measures differ, consider federal government net debt for calendar year 2018. Net debt was $772 billion (34.8% as a ratio of GDP) measured on a public accounts basis. Measured on a national accounts basis, federal net debt was $596 billion (26.9% as a ratio of GDP). According to the Department of Finance, the divergence arises from differences in the reporting of public sector pensions and other future benefits, methodological differences, and timing adjustments.

Debt held by foreign investors

In 1960, 4% of the Canadian government debt was held by foreign investors.

From 2009–2010 to 2013–2014, the amount of the Canadian's debt held by foreign investors increased from 15% to 27% with a peak of 30% in 2012–2013. According to 2012 and a 2014 Department of Finance reports, debt held by foreign investors was lower than or comparable to most G7 countries in 2013-2014, including France at 64%, Germany at 62%, United States at 48%, Italy at 33%, United Kingdom at 29%, and Japan at 8%.

Risk factors: interest rates, economic growth, and currency valuation changes

Major risk factors that can increase government debt include slowing economic growth, rising interest rates, and a decline in the value of the Canadian dollar.

Rising interest rates increase public debt charges, raising government expenditures. From 2011 to 2021, falling rates meant that while public debt rose, public debt charges decreased from $29 billion to $24 billion. The average interest paid on the federal debt was 4.6% in FY2007–2008, and by FY2020-2021 it was 1.4%. However, economist Don Drummond, a former Finance Department assistant deputy minister, said in October 2020 that the interest rate on public debt would certainly rise from the level at that time, which was by far the lowest in post-war experience. With federal government debt over $1 trillion, every one percentage point rise in the effective interest rate adds more than $10 billion per year to the federal deficit.

Drummond also noted that slow economic growth would reduce government tax revenue. Further, slower growth of GDP relative to growth of debt will increase the ratio of debt to GDP.

As of 2019, the International Monetary Fund views exchange rate risk as low for Canada because 90% of general government outstanding marketable debt instruments are denominated in Canadian dollars. For the 10% of debt denominated in foreign currency, there is exchange rate risk since if the Canadian dollar falls in value, a larger quantity of Canadian dollars is needed to repay the debt.

Debt comparison with other countries

The level of government (central, state, or local) responsible for government programs differs across countries.  For this reason, international fiscal comparisons are usually made on a total government, national accounts basis.  For Canada, total government includes the federal (central), provincial/territorial, and local governments.  Another reason to measure debt on a total government basis is that the federal government may be viewed as responsible for the debt of other levels of government.  Credit rating agency Fitch said it expects the federal government to provide a province with access to debt markets, as it did early in the coronavirus pandemic. When Newfoundland needed debt repayment assistance in March 2020, it appealed to the federal government. Any aid delivered to one province would reduce the resources the federal government has available for its own debt repayment responsibilities, and to support debt repayment in other provinces.  

According to the International Monetary Fund (IMF), Canada's general government gross debt for 2019 was 86.8% as a percentage of GDP. (To allow for consistent international comparisons, Canada's debt data is adjusted to exclude unfunded pension liabilities of government employees' defined-benefit pension plans. Canada's general government debt, including unfunded pension liabilities, would be about 104% of GDP on a gross basis in 2018.) The IMF says in 2018 Canada's general government gross debt would be 73.7% of GDP, just below the average debt level of economies with AAA ratings, if accounts payable are excluded to make its debt value internationally comparable.

The general government gross debt to GDP ratio for countries the IMF classifies as Advanced economies that have a population of at least 5 million is shown in the table below. In 2021, Canada had the fourth highest level of gross public debt as a percent of GDP among the G7 – lower than Japan, Italy and the United States, but higher than Germany, the United Kingdom and France.

General Government Gross Debt, Percent of GDP

	2020	2021
Japan	259.4	262.5
Greece	212.4	199.4
Singapore	152.0	159.9
Italy	155.3	150.9
United States	134.5	128.1
Portugal	135.2	127.4
Spain	120.0	118.6
Canada	117.8	112.9
France	114.7	112.6
Belgium	112.8	108.4
United Kingdom	102.6	95.3
Austria	83.3	82.9
Germany	68.0	69.6
Isreal	70.7	68.0
Finland	69.0	66.2
Slovak Republic	59.7	63.1
Australia	57.2	58.4
Ireland	58.4	55.3
Netherlands	54.6	52.3
Korea	48.7	51.3
New Zealand	43.2	50.8
Norway	46.8	43.4
Switzerland	43.3	42.1
Czech Republic	37.6	42.0
Sweden	39.2	36.8
Denmark	42.2	36.6

Source: International Monetary Fund, World Economic Outlook Database, October 2022. Numbers for 2021 are IMF staff estimates for Austria, Israel, Japan, New Zealand, and Sweden.

Public debt sustainability

In its staff report released in 2019, before the COVID-19 pandemic, the International Monetary Fund says the Canadian federal government experienced favorable economic conditions since the 2018 budget that led to sizeable windfall gains: higher than anticipated revenue collections, lower transfers to households, and lower projected interest rates.  On the other hand, pressures loom large on the horizon at the provincial level, with annual health care spending growth expected to rise from 3% to 4½% over a 10-20 year timeframe, contributing to rising net debt to GDP ratios by around 2025.

In the November 2020 Parliamentary Budget Officer Fiscal Sustainability Report, Yves Giroux, said that fiscal policy was sustainable over the long term for the federal government, but was not sustainable for seven of ten provincial governments. The deterioration in PTLG finances over the long term is due chiefly to the negative impact of the pandemic, lower oil prices, and rising health care costs from population ageing.  When fiscal debt management policies are deemed to be unsustainable, changes to current fiscal policy would be necessary to prevent excessive growth in government debt. The November 2020 update on sustainability, assumed that the budgetary changes taken during the pandemic would not be extended but withdrawn, and that no new programs would be added.

Credit ratings

A credit rating provides an indication of the sustainability of a government's debt, as it shows the rating agency's view of the ability of a borrower to "meet financial commitments". Credit rating agencies report on Canada's credit strength and their reports are used by investors—including sovereign wealth and pension funds. A credit rating may affect borrowing costs. Standard & Poor rates Canada's credit at AAA; Moody's is Aaa; Fitch's is AA+, and DBRS's is AAA. In 2022, all four credit rating agencies evaluate Canada's credit with a stable outlook. As of March 2022, Canada's DBRS AAA credit rating was maintained in response to expectations of the decline in the federal fiscal deficit 14.6% of GDP in FY 2020-2021 to 2.2% in FY 2022-2023.

See also

• Canadian federal budget
• Taxation in Canada
• Economy of Canada
• Ontario debt
• Debt-to-GDP ratio

General:

• Government debt
• Government budget deficit

International:

• List of sovereign states by public debt

External links

• Canadian Debt Clock, by the Canadian Taxpayers Federation
• Canadian Governments Compared