When Prime Minister Mark Carney’s government tables its first budget on Tuesday, Canada’s federal debt will tick higher – the only question is, by how much? Ottawa’s fiscal position has been wobbling in recent years, with costs from the pandemic and now the trade war is taking a toll on federal finances. But just how big is the federal debt, how did we get here and how much should Canadians worry? The Financial Post’s Jordan Gowling breaks down everything you need to know about government debt in Canada.

What is Canada’s national debt?

There are a few ways of calculating just how much Canada owes, but the one used by the

Parliamentary Budget Officer (PBO), Ottawa’s fiscal watchdog, involves adding up the government’s liabilities and subtracting its assets. Liabilities include marketable debt (i.e. government bonds), pension liabilities and accounts payable, while assets include cash and cash equivalents, taxes, foreign exchange accounts, loans and investments, as well as non-financial assets, which include inventories and tangible capital assets like federal buildings, infrastructure, vehicles, machines and equipment, land and prepaid expenses.

The PBO does not include the Canada Pension Plan (CPP) in its assessment of assets held by the federal government.

The PBO’s most recent debt estimate, released in September, pegged the debt at $1.281 trillion for 2024/2025 and projected it will rise to $1.655 trillion by fiscal 2030-2031. Based on a population of 41 million, the current year estimate works out to a little more than $31,000 per Canadian.

The PBO expects the amount of interest-bearing debt to grow more quickly than the net debt figure, with market debt rising by 59 per cent to $2.347 trillion by 2030-2031 from an estimated $1.478 trillion in 2024-2025. Total liabilities, meanwhile, will jump nearly 50 per cent to more than $3 trillion over the same period.

How did we get here?

The history of Canada’s debt goes back to confederation, when the dominion of Canada inherited $94 million in debt in 1867. This debt would rise slowly as Canada took on nation-building projects such as the Canadian Pacific Railway.

During the First World War, the debt rose sharply to $2.4 billion; during the Great Depression it jumped again to $5 billion; and by the end of the Second World War, it had reached $18 billion.

The country hit a period of economic turmoil with the 1973 OPEC crisis, as inflationary pressures caused interest rates to rise. In addition to higher carrying costs for debt, the country entered a recession in the early 1980s, which caused the debt to balloon from $84.7 billion in 1981 to $239.9 billion in 1986.

By 1993, the cost of servicing the debt had reached $41.3 billion, meaning more than one third of revenue was going toward interest payments.

As Canada entered the 1990s, its fiscal credibility began to be called into question.

In 1995, Liberal finance minister Paul Martin stood in the House of Commons to table one of the most consequential federal budgets in a generation. Martin was charged with restoring sound fiscal policy to Canada and tackling a national gross debt that had ballooned to $595.87 billion.

“The debt and deficit are not inventions of ideology,” said Martin. “They are facts of arithmetic.”

“The quicksand of compound interest is real” he added. “The last thing Canadians need is another lecture on the dangers of the deficit. The only thing Canadians want is clear action.”

Canada’s fiscal position at the time was a result of nearly 25 years of successive governments running

deficits . The Martin-Chretien intervention — which included job cuts in the public service, a reduction in business subsidies and the privatization of certain government services — stabilized the country’s finances, with the net debt falling to $554.7 billion by 2005.

This stability was interrupted in 2008, when the global financial crisis hit Canada’s economy. The debt ticked up in 2008-2009 then surged to $582.5 billion in 2009-2010 and kept rising until the 2014-2015 fiscal year when it stabilized again around $687 billion after the government of former prime minister Stephen Harper implemented a program review under its Deficit Reduction Action Plan (DRAP).

The pandemic in 2020 and the subsequent emergency fiscal measures taken during that period, would push the debt to over $1 trillion by 2021.

What is the deficit?

Every year, budget watchers zero in on the size of the deficit (or surplus) — which is the annual difference between government revenue and expenditures.

Since 1966, that number has more often than not been in the red: Over the past 60 budgets, Ottawa has posted 47 deficits and 13 surpluses.

The biggest deficit occurred during the 2020-2021 fiscal year when the country was in the grips of the COVID-19 pandemic and recorded a shortfall of $328 billion.

The second largest occurred in the 2009-2010 fiscal year after the global financial crisis, when the deficit hit $55.6 billion.

Between 1997 and 2007, the government ran a surplus every year. The largest surplus recorded during that stretch was in the 2000-2001 fiscal year, when it hit $17.9-billion.

Under Harper’s DRAP, the country returned to a surplus of $1.9 billion in 2014-2015, but the balance was short-lived: Under Justin Trudeau, Ottawa ran nine consecutive deficits, including a $61.9-billion deficit for the 2023-2024 fiscal year.

There is a consensus among analysts that the deficit for this fiscal year will be the highest it’s been in decades, outside the pandemic.

Estimates vary, with the Parliamentary Budget Officer forecasting a $68.5-billion deficit, Desjardins Group expecting a $70-billion deficit, the Bank of Montreal pegging it at $80 billion and the National Bank of Canada expecting a $100-billion shortfall.

Despite promised promised program cuts, economists say Carney’s government faces a revenue problem. It has cancelled several revenue-generating taxes including the digital sales tax and the increase to the inclusion rate on the capital gains tax while reducing the lowest marginal tax rate from 15 to 14 per cent. The

trade war with the United States is also expected to drag on economic growth, which could further reduce revenue.

Why is the debt-to-GDP ratio considered important?

A country’s debt-to-GDP ratio gives a sense of what it owes relative to the size of the economy, making it a useful metric to compare different countries and different periods of time. A declining ratio is seen as a sign of an improving fiscal position, even if the total amount of debt is rising.

Many countries, including Canada, have used debt to GDP as a fiscal anchor — a rule or guardrail intended to keep a government from letting spending get out of control.

Canada’s federal debt-to-GDP ratio peaked in 1996 at 67 per cent before the Chretien-era reforms, but for the most part has been on the decline since then.

The PBO, however, issued a stark warning in September, telling a committee of Parliamentarians that Canada’s fiscal situation was “unsustainable” and warned the debt-to-GDP ratio is expected to remain above 43 per cent over the medium-term.

Private sector forecasts have been similar. The Royal Bank of Canada projects Canada’s federal debt-to-GDP will hit 42.2 per cent in 2025-2026 and will remain above 42 per cent until 2030, where it will fall to 41.9 per cent.

While Trudeau had committed to reduce the debt-to-GDP ratio as a fiscal anchor in Budget 2024, current Finance

Minister François-Philippe Champagne and Carney have made no such assurance, with Champagne only vowing that

deficit -to-GDP ratio will decline over the medium term. The federal government has often touted Canada’s net debt-to-GDP position as standing out among its G7 peers, it depends in part on how you measure it.

The IMF’s calculation of net-general-debt-to-GDP, for example, puts Canada at 13.3 per cent, by far the best in the G7.

However, this way of measuring Canada’s debt position subtracts the pension fund assets such as CPP and QPP from gross debt.

Canada’s gross general debt-to-GDP, which includes other levels of government, stood at 113.9 per cent according to the IMF, which still puts Canada among the lowest in the G7, but presents a much more alarming debt position.

Is Canada’s debt sustainable?

There is a general consensus among analysts that Canada’s fiscal credibility remains strong, with the country holding strong credit ratings including AAA from S&P, Aaa from Moody’s and AA+ from Fitch, but there are risks entering the picture.

In July, Fitch reaffirmed Canada’s credit rating based on Canada’s “strong governance, high per-capita income and a macroeconomic policy framework that has delivered steady growth and low inflation.”

However, Fitch warned of factors that could lead to a downgrade, including a “macroeconomic shock” brought on by the trade war and a “material rise in the general government debt/GDP ratio in the medium term, for example from a marked widening in the budget deficit or weakening in GDP growth.”

In a recent survey conducted by the Business Council of Canada, experts and business executives backed Carney’s plans to invest in the economy.

However, they also warned that while Canada’s fiscal credibility remains strong, its fiscal discipline has eroded since the 1990s and 2000s. They recommended the federal government commit to a deficit reduction target, a declining debt-to-GDP ratio and declining debt-servicing ratio in the upcoming budget.

The PBO issued a stark warning in September, telling a committee of Parliamentarians that Canada’s fiscal situation was “unsustainable” and warned the debt-to-GDP ratio is expected to remain above 43 per cent from 2026 to 2031, with no declining trend.

What about debt at other levels of government?

While the focus is often on the federal government, Canada’s territorial, provincial and local governments carry substantial debt burdens too.

Statistics Canada’s measure of the total liabilities of territorial, provincial and local governments rose to $1.487 trillion in 2023, a 4.3 per-cent increase from the year before.

In 2024, provincial debt ranged from $35.2 billion in Saskatchewan to $458.2 billion in Ontario. Most provinces’ fiscal positions are expected to worsen in 2025-2026.

Other provinces with growing debt loads include British Columbia, which is projecting its total debt to hit $155.37 billion in 2025-2026. That province saw its credit rating downgraded this year by S&P Global Ratings from AA- to A+. Newfoundland and Labrador also has the highest per-capita debt, with net debt projected to hit $20 billion for a provincial population of just 545,000 people.

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“If you look at provincial government debt levels, that is much more concerning in terms of its level and trajectory, than the federal ones,” said University of Calgary economics professor Trevor Tombe. “If there is sustainability concerns provincially, than ultimately that’s a collective challenge.”

Tombe said the fiscal pressures facing provinces have a lot to do with provincial responsibility over healthcare spending and aging demographics.

“Projections vary, but if we look at what aging will mean for provincial health budgets, in aggregate I reckon they could increase by mid-century by about three percentage points of GDP,” said Tombe. “That’s enormous, if you were to fund that through tax increases, that would be a 10-percentage point change to a general sales tax.”

He added that ultimately, barring some exceptions, the federal government would have to help provinces face these pressures.

Read more from our Red Ink series:

  • How soaring government debt could play a starring role in the next great financial crisis
  • Danielle Smith: Balancing the budget gets a lot easier if you build a pipeline
  • Canada is in a small club of countries with a AAA credit rating. How long can it last?
  • Ottawa’s new budget framework is stirring controversy. Here’s what you need to know about it