Canadian public debt

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Canadian government debt, also called Canada's "public debt", is the liabilities of the government sector.  For 2019 (the fiscal year ending 31 March 2020), total financial liabilities or gross debt was $2.434 trillion ($64,087 per capita) for the consolidated Canadian general government (federal, provincial, territorial, and local governments combined).  This corresponds to 105.3% as a ratio of GDP (GDP was $2311 billion).  Of the gross debt, $1145 billion or 47% was federal (central) government liabilities (49.6% as a ratio to GDP).  Provincial government liabilities comprise most of the remaining liabilities.^[1]

Statistics Canada says debt is expected to rise significantly in 2020 due to massive new borrowing to cover expected historic deficits from measures implemented in response to the COVID-19 pandemic.^[2] As of the third quarter of 2020, the ratio of gross debt to GDP for the federal government reached 59.5% while the ratio for the federal plus other levels of government had climbed to 131.1%.^[3]

Some types of government liabilities are difficult to measure. One example is government employee pension plans that depend on members' longevity and on a plan's investment returns over many years. By contrast, government debt securities, such as Treasury bills and bonds, are relatively straightforward to value. Also, debt securities comprise the largest component of Canadian government liabilities: in 2019 they were 75.2% of federal government liabilities. Looking at just this component, in 2019 federal government security liabilities were $861.5 billion, or 37.3% as a ratio to GDP.  For the consolidated general government, the value was $1.782 trillion, or 77.1% as a ratio to GDP.^[4][5] By the third quarter of 2020, the book value of federal government debt security liabilities rose to $1.074 trillion, or 48.6% of GDP (GDP is $2.211 trillion using the latest 4 quarters). For federal plus other levels of government, debt security liabilities reached $2.107 trillion, or 95.3% of GDP.^[6][7]

Changes in government debt over time reflect primarily the impact of past government deficits.  A deficit occurs when government spending exceeds revenues.  Deficit financing may, or may not, create an intergenerational transfer in the sense that the beneficiaries of the spending the government provides through deficit financing differ from the individuals who have the obligation to repay the debt in the future. If the value of the spending being financed is enjoyed over the same period of time as the debt payments, then there is no intergenerational transfer; indeed deficit financing would prevent such a transfer.

Net Debt A common measure of government debt is net debt: gross debt minus financial assets.  The net debt to GDP ratio of Canadian governments was 60.9% in the third quarter of 2020.  The federal government's net debt to GDP ratio reached 34.0%, while that of other governments was 26.9%.^[8][9]

Net debt takes into account the financial assets governments hold, such as investments to cover the liabilities associated with government employee pension plans.  An issue with 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 recipient firms become insolvent.  

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.  

As an example of how the public accounts and national accounts measures differ, consider federal government net debt for calendar year 2018.  Measured on a public accounts basis federal net debt was $772 billion, or 34.8% as a ratio of GDP.  Measured on a national accounts basis, federal net debt (net financial assets) was $595.8 billion, or 26.9% of GDP.^[10] According to the Department of Finance, the difference arises from differences in the reporting of public sector pensions and other future benefits, methodological differences, and timing adjustments.^[11]

Revenue and spending[]

The 2019 Canadian federal budget was presented on 19 March 2019 with a total projected revenue of $338.8 billion and projected expenditures of $355.6 billion, resulting in a projected deficit of $19.8 billion (ca. 0.9% of GDP).

History[]

Canadian general consolidated government debt as a share of GDP exceeded 100% during the Great Depression of the 1930s and reached 150% following World War II.  The ratio fell until the 1970s, and then rose to over 100% in the mid-1990s.^[12]

A 1995 editorial in the Wall Street Journal said Canada might need an International Monetary Fund bailout and called Canada "an honorary member of the Third World."^[13] 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.  By the mid-1990s the government of newly-elected Prime Minister Jean Chretien 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%.^[13] 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.^[14]  

Provincial government gross debt as a share of GDP has increased fairly steadily since the 1960s. In 2019, provincial governments accounted for more debt than the federal government.^[15]

Government bond issues soared in 2020 to finance COVID-19 related spending, as shown in the figure below.  Federal government debt securities liabilities rose by $332 billion (to $1074 billion) while provincial, territorial and local rose by $111 billion (to $1034 billion) between the end of 2019 and the third quarter of 2020.  As a consequence, the ratio of all government debt securities 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).

Foreign ownership[]

In 1960, 4% of the Canadian government debt was held by foreign investors.^[16]

From 2009–2010 to 2013–2014, the amount of the Canadian's debt held by foreign investors passed from 15% to 27% with a peak at 30% in 2012–2013. Even if growing, this level is still lower than or comparable to most G7 countries in 2013-2014 (France, 64%, Germany, 62%, United States, 48%, Italy, 33%, United Kingdom, 29%, and Japan, 8%).^[17][18]

Risks that can impact Canadian national debt[]

Two major risks to federal government debt are identified by Don Drummond, a former Finance Department assistant deputy minister.  The first risk is that slow economic growth will reduce government tax revenue and increase the ratio of debt to GDP.  Second, Drummond argues the interest rate on public debt will almost certainly rise from the current level which is by far the lowest in post-War experience.  With federal government debt crossing the 1 trillion-dollar mark, every one percentage point rise in the effective interest rate adds more than $10 billion per year to the federal deficit.^[19]

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.^[20] 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.^[21]  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.^{[22] [23]} When Newfoundland needed debt repayment assistance in March 2020, it appealed to the federal government.^[24] 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 88.6% as a percentage of GDP.^[25] (To allow for consistent international comparisons, Canada's debt data is adjusted to exclude unfunded pension liabilities of government employees' defined-benefit pension plans.^[26] Canada's general government debt, including unfunded pension liabilities, would be about 104% of GDP on a gross basis in 2018.^[27]) 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.^[27]

The 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 2020, Canada had the fourth highest level of gross public debt per capita 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

Source: International Monetary Fund, World Economic Outlook Database, April 2021.  Numbers for 2020 are estimates, except for Italy, Singapore, Canada, United Kingdom, Germany, Finland, Norway and New Zealand.

Future expectations of the debt[]

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.^[28]

Yves Giroux, the Parliamentary Budget Officer (PBO), finds fiscal policy is sustainable over the long term for the federal government, but is not sustainable for seven of ten provincial governments.  The deterioration in provincial government 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 the PBO defines fiscal policy as unsustainable, he means changes in current fiscal policy are necessary to avoid excessive growth in government debt.  (The PBO analysis assumes the pandemic budgetary response measures are temporary and are withdrawn as currently scheduled.  Fiscal policy then reverts to its pre-crisis setting with no new programs or extensions.)^[29]

Public debt of Canadian provinces[]

The total financial liabilities or gross debt of the Canadian consolidated provincial, territorial and local governments (PTLG) was $1,260 billion in 2019 (the fiscal year ending 31 March 2020), as shown in the table below.  The debt is likely to rise in 2020, as decreased revenues and increased program expenditures due to COVID-19 resulted in additional borrowing, mainly in the form of provincial bond issuances.^[30]

The value of provincial outstanding debt securities liabilities varies from 24.1% expressed as a percentage of GDP for British Columbia, to 69.6% 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 $2.244 trillion of public debt obligations of Canadians.  At $1.260 trillion, gross debt of the consolidated provincial, territorial and local governments (PTLG) exceeds the federal government's gross debt of $1.057 trillion.  Similarly, the outstanding debt securities issued by the PTLGs, at 37.9% as a share of GDP, surpass the federal government's 33.4% share of GDP.

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 based on estimates of GDP in 2019 at current market prices, expenditure-based, available in Statistics Canada, Table 36-10-0222-01, https://doi.org/10.25318/3610022201-eng.

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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.^[31]

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.^[32]

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.^[33] In 2019, the market value of debt securities for the consolidated Canadian general government was approximately 12% higher than the nominal value ($1,782.5 billion compared to $1,592.6 billion.)^[34]

Calculating and projecting the debt[]

In 2002–2003, Canada changed its calculation for net debt. Until then, net debt was defined as the total liabilities minus total assets. Now, it is the total liabilities minus financial assets. The government prefers the concept of "accumulated deficit," which corresponds to the old definition of net debt.^{[citation needed]}

See also[]

• Canadian federal budget
• Taxation in Canada
• Economy of Canada
• Ontario debt

General:

• Government budget deficit
• Public debt

International:

• List of sovereign states by public debt

Notes[]

References[]

External links[]

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