This text is taken from Courrier de l’ économique. Click here to subscribe.
Canada is in a better position than the other G7 members, according to Minister Chrystia Freeland. Are all countries in debt?
When we calculate Canada’s net debt-to-GDP ratio, we do not include the net debts of the provinces. However, provincial budgets are interrelated with the federal budget. For what?
We rightly ask ourselves the same questions with each budget and each economic update. Ottawa will also present its own in two weeks.
How does Canada’s debt level compare with other G7 countries? our reader Luc Labrecque asked in the fall. And when we talk about this debt, are we taking into account not only the debt of the federal government, but also that of the provinces? asked Denis Lauzon, from Blainville, at the same time. After all, all these debts rest on the shoulders of the same taxpayers, he rightly pointed out.
How does the saying go again? “When we look at each other, we feel sorry; when we compare ourselves…”
It is not surprising to learn that experts use more than one method to measure government debt. Intuitively, we first think of the gross debt, which is the sum of all accrued liabilities and interest-bearing debt that come from past investments and deficits, to which we add the obligations linked to public health plans. retirement.
But as we consider it important to differentiate what results from the deficits of past budgetary years (the famous grocery expenses paid on credit) from investment in physical assets (the construction and maintenance of infrastructure, for example) or financial (those of public pension plans, in particular), we often quickly turn to net debt, which subtracts these different forms of assets from the total.
And because a new debt of a billion dollars does not weigh as heavily on the American government as on that of Prince Edward Island, we always report these different debts in proportion to the size of the economy (the gross domestic product, or GDP) which will ultimately have to finance them.
Canada does well
Thus, the gross debt of the Canadian federal government gradually fell from more than 64% of GDP in the mid-1990s to around 30% before the financial crisis of 2008, after which it rose to around 40%, before rebounding to 61% in 2020, due to the COVID-19 pandemic, and to fall below 50% in 2022, reports the International Monetary Fund.
The gross debt of all public administrations in Canada — provinces, municipalities and public agencies included — followed essentially the same trajectory, going from a total equivalent to the size of the entire Canadian economy (100% of GDP) in the mid-1990s to a low of 67% before the financial crisis, then to a new high of almost 119% during the year of COVID, before declining again to settle at 107% in 2022.
This was better than other G7 countries, including the United States (121%) and Japan (261%), with the sole exception of Germany (67%).
Canada does even better when taking into account the physical and financial assets of governments. The net debt of all Canadian public administrations increased significantly with the pandemic, going from the equivalent of 26% of GDP in 2019 to 32% in 2021, but this remained much better than other G7 countries, including Germany (46%), the United States (98%) and Japan (157%).
Fun fact: by subtracting assets from gross debt, we can end up with very low, or even negative, net debts when these assets are very large. This is particularly the case in several countries in Northern Europe, noted last year the Chair in Taxation and Public Finance at the University of Sherbrooke. Norway is the great champion in this area, with a net debt of -85% of GDP, thanks to its gigantic sovereign fund built up from its oil revenues.
Sustainable debt
Okay. Canada does better than others. But that does not mean that the debt of its governments is sustainable in the long term.
It’s just. But public administration debt in Canada IS financially sustainable in the long term, concluded the Parliamentary Budget Officer in Ottawa in his latest review of the situation, in July. Even when taking into account rising debt costs, the impact of population aging on health care costs, and the likelihood of low long-term real economic growth, overall debt is expected to together, gradually decline in the long term in proportion to the size of the economy if public administrations do not fundamentally change their spending and revenues.
Ottawa could even afford to increase spending or cut taxes by the equivalent of 1.7% of GDP (or $50 billion) while stabilizing its net debt at just 30% of GDP. If he could not say the same about Ontario or British Columbia, the parliamentary budget officer added that the government of Quebec also had room for maneuver equivalent to 1.8% of its GDP and could even hope to see its net debt as a proportion of GDP enter negative territory, like Norway, to amount to -10% in 2047, -73% in 2072 and -147% in 2097.
But hey, all this takes us a long way. And we already know that governments will not be able to simply stay the course in the next 75 years, if only because of climate issues.