Federal and provincial government debt mounting quickly in Canada

Due to persistent budget deficits in the decade following the 2008 recession and, more recently, the economic effects of COVID-19, government debt is rising rapidly across Canada. Hence, as budget season looms, it’s especially important for Ottawa and the provinces to develop credible long-term plans to curb debt accumulation and avoid making the problem worse.

Since 2007/08, combined federal and provincial government net debt (gross debt minus financial liabilities) has doubled (on an inflated-adjusted basis) from $1.0 trillion to $2.0 trillion due largely to increased government spending. Half of the increase occurred prior to 2020 and the other half occurred in 2020 with COVID-related spending measures.

While federal and provincial debt levels rose in every province between 2007/08 and 2020/21, Canadians face different government debt burdens depending on where they live. For instance, provincial debt levels vary widely while the federal debt burden is unevenly distributed among provinces.

So, who are the most government-debt-ridden Canadians?

According to a new Fraser Institute study, Newfoundlanders and Labradorians hold the highest combined (federal and provincial) debt among their provincial counterparts at $64,224 per person. Ontarians rank a close second ($58,559) while British Columbians have the lowest combined government debt per person in Canada ($43,635).

The debt-to-GDP ratio (a measure that compares debt to the size of the overall economy) is another way to compare government debt between provinces and evaluate the sustainability of debt accumulation. Notably, six provinces have combined debt-to-GDP ratios above 100 per cent in 2020/21 compared to zero provinces the year prior.

Nova Scotia has the highest combined debt burden in the country at 106 per cent of its economy followed by New Brunswick (105 per cent).

Nationally, the combined federal-provincial net debt-to-GDP ratio in Canada will reach a projected 91.6 per cent this year, up from 65.2 per cent in 2019/20. And this growth will likely continue in the future as Ottawa and most provincial governments plan to run sizeable budget deficits for years to come.

At the same time, Canada’s aging population could mean Canada’s tax base grows relatively slowly, given the existing tax structure and tax rates. Consequently, governments will likely experience slower revenue growth in the future. A higher proportion of Canadians over the age of 65 will also prompt more spending on health care and senior benefits. Between constrained revenue growth and long-term increases in spending, Canadian governments are on track—absent change in policy—to accumulate significant debt for the foreseeable future.

But what are the consequences of all this growing government debt?

For starters, governments must pay interest on debt just like households must pay interest on mortgages, vehicle purchases and credit cards. Taken together, the federal and provincial governments currently spend almost $50 billion in annual debt interest payments. However, these debt interest costs will likely grow due to the potential for rising interest rates, which will leave fewer resources for tax cuts or government programs such as health care, education and social services once the pandemic is over.

Ultimately, growing government debt not only burdens current taxpayers, but future generations of Canadians who will finance these debts, potentially through higher taxes. And these higher-than-anticipated taxes could also hamper future economic performance and the ability of provinces to compete with one another—and other jurisdictions worldwide—for business investment and high-skilled workers.

Growing government debt represents a serious problem for Canadians. This budget season, the federal and provincial governments should craft long-term solutions to reverse this trend and begin restoring sound fiscal principles in a post-COVID world.