Strategy

The truth about Canada's debt

Measuring public indebtedness is the easy part. Paying it off will be a lot tougher.

Canada’s efforts to pay down its national debt came off the rails last year. Responding to a deteriorating economy, federal Finance Minister Jim Flaherty racked up an estimated $56-billion deficit. Consequently, Canada’s debt recently rocketed past half a trillion dollars. That’s roughly what the mighty United States spends annually on its military. But as global concerns of sovereign debt crises grow, how daunting is Canada’s problem?

In dollar terms, it’s as bad as ever. Canada’s debt peaked in fiscal 1997-98 at $563 billion. It was steadily reduced thereafter, to $458 billion in 2007-08. But our fiscal situation deteriorated so quickly that we may hit a record by the end of fiscal 2010-11, according to the Canadian Taxpayers Federation.

Nominal amounts reveal little by themselves. To gauge the resulting burden, they’re often compared to GDP. Canada’s economy grew considerably since the 1990s, helping reduce the debt-to-GDP ratio from 68% in 1995 to about 29% in 2008. Even at an estimated 34% today, that’s still better than any other G7 nation. (Italy’s at nearly 100%.) Canada is also one of only a handful of nations that can boast a smaller debt-to-GDP ratio than it had a decade ago. Warren Lovely, an economist with CIBC, recently opined that “Canada offers safe harbour in today’s global debt storm.”

The OECD and IMF use a different measure of debt burden, which expresses gross financial liabilities as a percentage of GDP. It includes all liabilities from all government institutions in a country — which in Canada includes our provinces, some of which are fiscal basket cases. (Ontario’s books are particularly gruesome.) As the word “gross” implies, it ignores financial assets on hand that cover certain liabilities — for example, a funded pension plan. This figure makes Canada seem less virtuous: the IMF says our gross debt stands at about 78% of GDP, which is worse than France (!) and Britain (!!) but still better than the U.S. The Department of Finance considers this measure less useful than net debt-to-GDP, but the OECD and IMF use it because gross debt is easier to measure — thus simplifying international comparisons.

Our debt burden will probably grow. As more Canadians retire, slower labour-force growth will mean lower tax revenues even as health-care expenses and old-age benefits rise. In a recent report, Parliamentary budget officer Kevin Page projected that under Canada’s current fiscal structure, its debt-to-GDP ratio would spiral out of control later this century. To avoid that, some combination of tax increases or reduced spending is needed. That’s why Flaherty’s plan to eliminate deficits will be perhaps the most crucial aspect of his coming budget.