We’re deeper in debt than Ottawa tells us

Time and time again, the Trudeau government has justified increases in spending and debt by claiming Canada is in the “enviable position” of having the lowest net debt-to-GDP ratio in the G7. But this is a flawed and misleading way of looking at Canada’s government indebtedness. When we dig further into the numbers, Canada’s debt position isn’t so enviable after all.

The government’s claim that Canada enjoys comparatively low levels of debt originates from an International Monetary Fund (IMF) database, as displayed on page 24 of the most recent federal budget. According to the IMF, Canada does indeed have the lowest net debt-to-GDP ratio among the G7 countries (Germany, Italy, Japan, France, the United Kingdom and the United States).

But the limited set of comparison countries appears to have been carefully selected. Extending the analysis to include a broader group of countries provides a more accurate assessment of Canada’s comparative indebtedness. Among 29 OECD countries (which have comparable data available), Canada drops to 11th in 2023 when ranked by net debt as a share of the economy—no longer best, just middle of the pack.

And there’s a problem with “net debt,” the measure the government uses. Net debt is a narrow measure of indebtedness that subtracts financial assets from total government debt. The implicit assumption is that those assets could be used to offset debt. But the financial assets used to calculate Canada’s net debt include assets of the Canada and Quebec Pension Plans (CPP and QPP), which totalled $654.7 billion as of last December 31st.

But the difference between gross debt and net debt, according to the IMF, is almost $2.6 trillion at the end of 2023. In other words, the value of net assets held in the CPP and QPP explains more than a quarter of the difference between Canada’s gross and net debt.

Why does this matter? The assets of the CPP and QPP are required to meet the obligations for existing and future retirees, so they couldn’t be used to offset government debt without compromising the two plans’ ability to provide benefits to retirees.

Desjardins Economics does offer a comparative analysis of net debt excluding pension assets among G7 countries. By this measure, Canada has the second lowest net debt-to-GDP in the G7. However, this is again flawed. Desjardins only looks at net central government debt. In other words, it compares the indebtedness of Canada’s federal government to the indebtedness of central governments in other countries. But while the U.K., France, Japan and Italy are all “unitary” states, Canada is a federal country where provinces have many constitutional powers (i.e. health care and education) and spend a lot and have accumulated significant debt. Comparing the net debt of Canada’s federal government to that of central governments in G7 countries is not an apples-to-apples comparison.

So, a better measure of Canada’s comparative indebtedness is to compare “gross general government debt” to GDP. Gross debt, according to the IMF, includes “all liabilities that require future payment of interest and/or principal by the debtor to the creditor” while general government includes all levels of government.

Using this measure, Canada falls from 11th among 29 OECD countries when net debt is measured to 20th. Our nine-position decline in the ranking is the second-largest change of any country (behind only Finland, which falls 16 places). Even worse, our gross debt is equal to 111 per cent of our GDP, which isn’t good by anyone’s standards.

By continuing to repeat the claim that Canada has comparatively low levels of debt, the Trudeau government is misleading Canadians. The data clearly demonstrate that Canada is highly indebted relative to many of our peers—and that’s far from an enviable fiscal position.