Road to Ruin or Fiscal Fearmongering? Busting Myths about Government Finance in Canada

Coming out of the 2023 budget season, there is no shortage of views about government spending, taxing and borrowing in Canada. Indeed, prognostications of impending fiscal demise in the Great White North are a dime a dozen. But is there any substance to the view that public finances in Canada are on a road to ruin, or is it fiscal fearmongering that is unsupported by the data?

This note explores several myths about government finance in Canada, explaining which claims are unsubstantiated or, in some cases, why they may contain a grain of truth.

Myth 1: Government debt is much higher in Canada than in other advanced economies. This is categorically untrue. Canada has the lowest net government debt in the G7 and is middle of the pack when it comes to gross government debt.

Myth 2: Net government debt only looks good because of public pension plan assets. This isn’t the case. The federal government continues to have one of the lowest net debt-to-GDP ratios in the G7 even in the absence of social security funds.

Myth 3: Canadian governments are about in the same fiscal position they were in during the 1980s and 1990s. Not so much. Government debt-to-GDP and interest-to-revenue ratios are below where they were in the 1990s and, given the very different rate and growth outlook, that doesn’t look set to change.

Myth 4: Government of Canada debt is on an unsustainable trajectory. Not currently, but there are risks. Both the Government of Canada and Parliamentary Budget Officer have determined that federal finances are sustainable. But this assumes everything goes according to plan and there is no substantial new spending. The risks are to the downside.

Myth 5: If you include the provinces, government debt in Canada looks much worse. No, not really. Canadian provinces are more indebted than subnational jurisdictions elsewhere in the G7, but that partly reflects the unique role that provinces play in the federation. The upside surprises in the 2023 budget season will end up improving the sustainability math for some of them.

Myth 6: Canadian governments are running massive deficits. Wrong again. When looking at all levels of government together, Canada has among the smallest budget and structural deficits in the G7. At the federal level, cyclically-adjusted budget deficits are near their historical averages.

Myth 7: All of the new spending in the 2023 budget season was inflationary. Some, but certainly not all of it. At the federal level, most of the new spending announced in Budget 2023 is not especially inflationary. However, the provincial affordability measures may be more so.