Top Three Concerns Over Canada’s Rising Debt

Canada’s rising debt is a growing concern, with implications for the country’s economic future. The government claims Canada has the lowest net debt among G7 nations, but this narrative lacks crucial context. Below are the top three concerns regarding Canada’s escalating debt burden.

1. Net Debt Doesn’t Tell the Whole Story

The federal government showcases a favorable net debt statistic of just 13.3 percent of GDP. This figure is lower than those of other G7 countries. However, this measure includes significant assets, notably public pension investments from the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP).

While these assets exist, they are earmarked for future pension payouts, making them inaccessible for other government spending. The growing disparity between net and gross general government debt paints a concerning picture for Canada. Over the last three decades, net debt has dropped significantly relative to gross debt. Three decades ago, net debt was approximately two-thirds of gross debt; today, it is only about 10 percent of that measure.

2. Rising Debt Servicing Costs

The federal government’s spending on debt servicing is escalating rapidly. In fiscal 2016, debt servicing costs were $21.8 billion. Projections indicate that this figure could escalate to $76.1 billion by 2030.

• Debt servicing could surpass spending on major programs, such as the Canada Child Benefit.
• By 2030, debt charges will consume nearly 12 cents of every dollar spent.

Historically, such expenditure percentages have fluctuated. Nonetheless, without returning to budget surpluses, the continuing increase in debt servicing costs raises significant alarm regarding fiscal sustainability.

3. Uncertain Long-Term Projections

Long-term forecasts for the federal debt burden are complex and changing. Recent budget projections indicate that net federal debt as a proportion of GDP is expected to decline to 37.2 percent by 2056, a noticeable revision from earlier estimates.

Economist Don Drummond warns, however, that a slight increase in interest rates could substantially alter this trajectory. For example, if interest rates rise by just one percentage point, debt could reach 48.5 percent of GDP by 2056. This potential scenario underscores the vulnerability of the federal budget to even minor economic fluctuations.

Factors like unaccounted spending commitments and the likelihood of future recessions could exacerbate Canada’s debt concerns further. Thus, without immediate action to stabilize the debt load, the country may find itself in a precarious financial situation.

In summary, while the Canadian government presents a reassuring picture of fiscal health, the underlying issues related to net debt, servicing costs, and long-term forecasts warrant serious scrutiny. Canadians must remain vigilant about the implications of rising debt.