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Opinion: Despite what Ottawa claims, we are highly indebted compared to other countries

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The state of Canada’s government indebtedness is made all the more worrying given Ottawa’s continued dismissal of debt as a problem, writes the authors. © Provided by Financial Post The state of Canada’s government indebtedness is made all the more worrying given Ottawa’s continued dismissal of debt as a problem, writes the authors.

By Jason Clemens, Milagros Palacios and Jake Fuss

The last federal fiscal update lauded Canada’s low government indebtedness, a continuing theme from Ottawa. According to the update, “Canada continues to have the lowest net debt-to-GDP ratio relative to international peers.” The Trudeau government repeatedly uses this statistic to justify the continued borrowing and record deficits currently financing historically high levels of government spending (that in fact predate the COVID pandemic). But a broader assessment of Canadian government indebtedness raises serious concerns about our country’s ability to continue to finance spending through borrowing.

The text of the update refers to “international peers” but the comparison is actually limited to the G7 — Canada, Germany, the United Kingdom, the United States, France, Italy and Japan. Among these countries, Canada does have the lowest net debt as a share of its economy at 23.4 per cent in 2019. But why limit the analysis to just the G7? Canada competes with many other industrialized countries. If the analysis is extended to include the 31 high-income countries covered by the IMF , Canada’s ranking for 2019 falls to 10th. (In fact, the IMF forecasts that for 2021 Canada will fall to 11th).

The government’s habitual reliance on “net debt” is also a problem. Net debt adjusts for financial assets such as currency holdings and gold. It’s meant as a measure of how much debt a government would owe in the admittedly hypothetical instance that it liquidated its financial assets. It excludes less liquid assets such as buildings and highways.

Using net debt makes comparisons between Canada and other industrialized countries difficult. Canada’s public pension plans are unusual for the industrialized world. In most countries, public pensions invest in government bonds. The Canada Pension Plan and Quebec Pension Plan , however, invest in assets such as stocks and non-government bonds.


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This makes our net debt look better than other countries’. When other countries’ public pensions invest in government bonds, there’s no effect on the government’s net debt. There’s both an asset for the public pension plan and a liability for the government. When net debt for the overall government is calculated they cancel.

Not so when the CPP and QPP invest in non-government assets. So as both public plans have increased their assets, the net debt position of Canada’s government has improved. But this is misleading: the assets of the CPP and QPP are not actually available to either the federal or provincial governments: they’re committed to financing the benefits promised to retirees in both programs.

When we look at total government debt rather than net debt — which essentially removes the assets of the CPP and QPP — Canada’s relative indebtedness is among the worst in the industrialized world. In 2019, it was 86.8 per cent of GDP, which ranked 24th among 31 industrialized countries. Only seven — Belgium, France, Italy, Japan, Portugal, Spain and the U.S. — had a higher debt-to-GDP ratio than Canada. The IMF expects us to remain 24th in 2021, though our debt will reach 109.9 per cent of GDP.

The state of Canada’s government indebtedness is made all the more worrying given Ottawa’s continued dismissal of debt as a problem. In the recent throne speech , which laid out the priorities of the federal government, the words “deficit” and “debt” were not mentioned once, even as Ottawa continues to laud our low net debt, which as we’ve explained, is misleading.

Despite what Ottawa claims, we are highly indebted compared to other countries. That imposes serious risks on Canadians and the economy. At the very least, Ottawa needs to acknowledge the real state of Canadian government indebtedness.

Jason Clemens, Milagros Palacios and Jake Fuss are economists with the Fraser Institute.

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