Opinion: Despite Ottawa’s claims, we’re heavily indebted to other countries

When you look at total debt, Canada is among the worst in the industrialized world

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By Jason Clemens, Milagros Palacios and Jake Fuss

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The latest federal fiscal update praised the Government of Canada’s low debt load, a recurring theme in Ottawa. According to the update, “Canada continues to have the lowest net debt-to-GDP ratio compared to its international peers.” The Trudeau government repeatedly uses this statistic to justify continued borrowing and the record deficits currently funding historically high government spending levels (which actually pre-date the COVID pandemic). But a broader assessment of the Canadian government’s indebtedness raises serious concerns about our country’s ability to continue financing its spending through borrowing.

The text of the update refers to “international peers”, but the comparison is actually limited to the G7 – Canada, Germany, UK, US, France, Italy and Japan. Among these countries, Canada has the lowest net debt as a proportion of its economy, at 23.4% in 2019. But why limit the analysis to the G7 only? Canada competes with many other industrialized countries. If the analysis is extended to the 31 high-income countries covered by IMF , Canada’s ranking for 2019 drops to 10th. (In fact, the IMF predicts that by 2021, Canada will fall to 11th place).

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

The use of 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.

This makes our net debt better than other countries. When other countries’ public pensions invest in government bonds, it has no effect on the government’s net debt. There is both an asset for the public pension plan and a liability for the government. When the net debt of the whole of government is calculated, it cancels out.

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This is not the case when the CPP and QPP invest in non-government assets. While both public plans have increased their assets, the Government of Canada’s net debt position has improved. But this is misleading: the assets of the CPP and the QPP are not in fact available to either the federal government or the provincial government: they are committed to funding the benefits promised to retirees in the two programs.

When we look at total public debt rather than net debt—which essentially takes away CPP and QPP assets—Canada’s relative indebtedness is among the worst in the industrialized world. In 2019, it accounted for 86.8% of GDP, which ranked it 24th out of 31 industrialized countries. Only seven—Belgium, France, Italy, Japan, Portugal, Spain and the United States—had a higher debt-to-GDP ratio than Canada. The IMF expects us to remain 24th in 2021, even though our debt will reach 109.9% of GDP.

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  1. Pedestrians cross the intersection of Bay Street and Wellington Street West in the financial district of Toronto, Ontario, Canada, Thursday, March 25, 2021. Premier Doug Ford said further lockdowns could occur as a government agency tracking hospitalizations reported the biggest single-day jump in ICU patient admissions since the start of the pandemic, CBC reports.  Photographer: Galit Rodan/Bloomberg ORG XMIT: 775639811

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  2. Prime Minister Justin Trudeau during a press conference in Ottawa on December 15, 2021.

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  3. Prime Minister Justin Trudeau in the Oval Office of the White House in Washington, DC on November 18, 2021.

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The state of the Government of Canada’s debt is all the more worrying as Ottawa continues to dismiss the debt as a problem. In the recent throne speech , which set out the priorities of the federal government, the words “deficit” and “debt” were not once uttered, even as Ottawa continues to tout our low net debt which, as we have explained, is misleading.

Despite what Ottawa claims, we are very indebted compared to other countries. This poses serious risks to Canadians and to the economy. At the very least, Ottawa must recognize the true state of the Canadian government’s debt.

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

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