The federal government’s fiscal watchdog gave an alarming bark last week, with the use of a single word that seems low key to ordinary ears but rings loudly indeed for finance types: unsustainable.
The interim Parliamentary Budget Officer, Jason Jacques, used that word to describe the trajectory of Canada’s debt, no longer projected to grow more slowly than the economy through to the end of the decade, a turnaround from the watchdog’s previous assessments.
It’s the culmination of the Liberals ignoring years of warning that their loose fiscal policies would leave the federal government without enough fiscal muscle to deal with an emergency — exactly the caution that the PBO is now raising.
The written report from the PBO uses slightly more technical language, saying that federal deficits projected to hover above $60-billion in coming years “raises concerns about the long-term sustainability of current fiscal policy.”
The underlying numbers don’t seem terribly worrying, at first glance. As the graph below shows, the PBO is now projecting that net federal debt as a percentage of gross domestic product will rise to 43.7 per cent by 2029, 4½ percentage points higher than the office’s previous projection.
By itself, that figure is not particularly noteworthy. As recently as 2020, Canada’s net debt-to-GDP ratio was 47 per cent. But that was a temporary spike, which receded as pandemic benefits tailed off and the economy regained its footing.
The Trudeau Liberals had set a fiscal goal of reducing that burden in the medium term, but counted on economic growth to do the work. As a result, Ottawa entered 2025 with a debt burden significantly higher than prepandemic levels.
That might not have mattered without Vladimir Putin invading Ukraine and Donald Trump coming to office. Both of those seismic events have pushed Canada to ramp up defence spending. And Mr. Trump’s re-election has destabilized the Canadian economy. The fiscal emergency that the Liberals were warned about has arrived.
Hit the gas, or the brakes?
Jason Jacques, Canada's interim Parliamentary Budget Officer, characterized the trajectory of Canada’s debt as 'unsustainable.'Justin Tang/The Canadian Press
Unlike the spike earlier this decade, the debt burden is now projected to rise over time. Mr. Jacques used the metaphor of a cliff to describe the fiscal landscape: the federal government has not gone over the cliff, but it can see the precipice.
A better analogy is that of a car speeding toward a hairpin curve a kilometre away. There is plenty of time to tap the brakes, and slow to a safe speed. But if the driver instead chooses to keep their foot on the gas, disaster will inevitably ensue. At some point, it will simply be too late to hit the brakes.
That is the situation that confronts the federal government: the consequences of today’s fiscal drift won’t be felt until much later, when the scope for action will be much reduced. Canada’s credit rating is solid, bond markets are not driving up this country’s borrowing costs, as critics of the PBO have pointed out. There is no crisis.
But peer far enough into the future, and that hairpin curve is visible.
A look at this second chart underscores that point. The PBO’s numbers point to a sharp rise in debt servicing costs through to the next decade, with a growing proportion of federal revenue siphoned off to interest payments – a reversal of the trend since the fiscal retrenchment of the late 1990s and early 2000s.
By fiscal 2031, nearly 14 cents of every dollar in revenue will go to debt servicing, the PBO forecasts. That may prove to be an optimistic assessment, since the PBO’s numbers do not include the billions of dollars that Canada will need to spend to boost its defence outlays to 5 per cent of GDP from the current levels of 2 per cent. Neither does the forecast include the cost of much of the Liberal election platform.
On the other hand, the PBO has also not taken into account the government’s spending reallocation exercise, in which it has asked some government departments to reduce operating expenditures by 15 per cent within three years. To be fair to the PBO, the Carney government has yet to lay out what the exact parameters of that exercise are, never mind a precise target. (The Liberal platform did contemplate $15-billion in spending reallocations, but that was before the ramp-up in defence spending, among other costs.)
Fiscal projections from a C.D. Howe Institute report this summer did include all those factors, projecting a debt burden in fiscal 2029 that is $88-billion higher than the PBO forecast. The authors of that report warned this week that the PBO numbers are overly cautious and underestimate the peril of rising federal debt.
The federal budget, slated for Nov. 4, will need to provide clarity on the key question of how much new spending the Carney government is prepared to add to an already growing deficit.
The fastest growing program for Ottawa
Part of the problem in discussing public debt is that the numbers are so large as to be close to meaningless. And the measures of debt – the size relative to GDP, the interest bite on revenue – can seem abstract, and therefore unalarming.
Here is a more concrete expression: by 2031, public debt charges will be Ottawa’s second biggest single expenditure, second only to benefits paid to senior citizens, according to the PBO.
As this third chart shows, the PBO forecasts that the federal government will spend $82.4-billion on public debt charges within six years, more than triple the cost of debt servicing in fiscal 2019. From fiscal 2024 through to fiscal 2031, the PBO model shows debt servicing costs surging by 53.7 per cent, far more than the nearest contender, elderly benefits, forecast to rise by 33.7 per cent.
Ottawa is forecast to spend nearly $13-billion more on debt servicing than on health transfers to the provinces and territories. Interest costs will be higher than spending on the Canada Child Benefit, equalization payments and daycare – combined.
That does not mean Canada will be in a debt crisis by 2031. But it does mean that the debt burden will be much heavier, and changing fiscal direction that much harder.
Slated for Nov. 4, the federal budget will need to provide clarity on how much new spending the Carney government is prepared to add to an already growing deficit.Sean Kilpatrick/The Canadian Press
A fiscal retrenchment in this November’s budget, while not painless, would be much easier than one six years from now. The incremental measures that the Carney government has so far laid out are unlikely to slow the rise in debt sufficiently. (And that is assuming the Liberals don’t lapse into the spend-and-hope habits of the Trudeau government.)
What might a more prudent approach that look like? Significant cuts to the public service, including a continuing reduction in the operating costs of government. Major reductions to business grants and subsidies. A reworking of benefits to senior citizens, to focus income subsidies on those who are truly poor, not on households with incomes multiples higher than the national average.
Such measures might seem painful, but failing to take such steps now will entail even more drastic action early in the next decade.
The closer you get to the hairpin curve, the harder you need to jam on the brakes – or else find the road disappearing under your wheels.
The Sunday Editorial
When the police tangle with the Crown
The three villains of the Canadian economy