Dollar Rooftop

The issue of government indebtedness comes up regularly in public discussions. At these times, we hear claims that Canada’s debt-to-GDP ratio is healthy. Often, comparisons are made with the indebtedness ratios of individuals and businesses. However, the following two points are rarely, if ever, mentioned:


Individuals and businesses incur debt with the intention of servicing that debt (that is, paying the principal and interest) from the fruits of their own economic activity. It is necessary to note here that some of this activity may have taken place in the past, and indeed even in previous generations. In this case, the financial value of this activity is stored in assets such as property, financial instruments and other investments / savings. Alternatively, this activity may take place in the future. The key factor here is that individuals and businesses service their debts from their own resources.

A government, in contrast, is not a direct participant in the economy, apart from maintaining an administrative apparatus. Its revenues are derived from the economic output of the direct participants, viz. individuals and businesses. This is achieved through the government’s coercive power to levy taxes and other fees.

Therefore, comparing the indebtedness ratios of individuals and businesses on one hand, with that of governments on the other is a case of apples and oranges. In terms of receiving revenue, a government is an entity whose revenues depend on the income of other entities. (We shall return to this point later).


Another feature of the public discussion on the debt-to-GDP ratios of various governments is that such discussion normally considers one government in isolation, typically the federal government or that of one province. However, the direct participants in the economy are the source of revenue for three levels of government simultaneously, viz. federal, provincial and municipal. They are also the generators of GDP. Since all three levels of government incur debt separately, and since all government debt is intended (at least in theory) to be serviced from tax revenue to be derived from the same GDP, the correct way to calculate the debt-to-GDP by including all government debt. Sadly, this is not done.

One difficulty here is that the figures of municipal debt are hard to obtain. The number of municipalities is large, and their debt figures are not prominently reported, often buried in Budget documents that are sometimes hundreds of pages long. The most recent data that I found for the total indebtedness of all the municipalities in Ontario was an estimate for the year 2016-17, at an estimated $ 318 Billion (see Note 1). For this reason, municipal debt is not included in the table that follows.
With these that in the background, let us see how government debt in Canada stacks up against GDP. As can be expected, the picture is not as rosy as we are led to believe.

 JURISDICTION                      DEBT
 (2018-19 FIGURE, MILLION $)
(See Note 2)
British Columbia                            42,681
Alberta                            27,477
Saskatchewan                            11,834
Manitoba                            24,999
Ontario                            338,496
Quebec                            172,558
New Brunswick                            13,959
Nova Scotia                            15,010
Prince Edward Island                            2,124
Newfoundland & Labrador                            15,374
Federal                            685,500
(Federal + provincial ONLY)

Thus, the total of federal & provincial debt was $ 1,350.01 Billion. As against this debt, the GDP of Canada for the year 2018 was $ 2,219.10 Billion (See Note 3). I did not find the GDP figure for the full year of 2019 from an official source. I will assume a growth rate of 2% for 2019 (more robust than the last two quarters, which came in at 1.1% and 0.3% respectively), to arrive at a tentative GDP figure for 2019 at $ 2,263.48 Billion. This yields a debt-to-GDP ratio of almost 60%, i.e. much higher than the ratio of around 37% that is usually bandied about.

If we add the aggregate debt of all the municipalities of Ontario mentioned above (this is admittedly a bit suboptimal measure, as the data is from a different year), the figure for government debt increases to over $ 1,668 Billion. This then yields a debt-to-GDP ratio of nearly 74%. It is very likely that if we add the municipal debt from across the other provinces, the real ratio of all government debt to Canada’s GDP exceeds 100%. At the very least, it will be quite close to 100%.


So what does this mean?

Since any government’s ability to service debt depends on the income outcomes of the economic participants in the society, having a debt-to-GDP ratio very near (or above) 100% means that the governments have collectively borrowed to the very limit of the GDP generators’ collective ability to service that debt at the existing rates of income and taxation . At the same time, the need to borrow more is higher in times of a recession, or when one is imminent. Any increase in borrowing by governments will have to be serviced by one of the following measures:

a. Increase in taxation. We are already seeing this in Canada, in the form of gradually increasing carbon tax, and the generally less talked about Clean Fuel Standards levy. Canadian economy was already sputtering in Q4 of 2019, showing an anemic growth rate of 0.3%, and now faces a significant negative impact of the double whammy of Coronavirus and the oil price war between Saudi Arabia and Russia. One tenet of economic theory is that at such times of economic uncertainty, any increase in taxes is leads to further economic hardship for people.

b. Devaluation of currency. In the current global scenario, interest rates are extremely low – barely above zero, and in some jurisdictions, even negative. These rates are unlikely to increase in the short term, and perhaps even beyond the short term. While low interest rates, in theory, provide some relief to the people, increasing these rates can have the effect of improving capital inflows and thus stabilize the Canadian Dollar. Canada’s inability (or unwillingness) to increase interest rates, together with the very significant cost-push effect of increased taxes (resulting in inflation, will most likely have the effect of the Canadian Dollar losing value in terms of purchasing power. The government will gain by making interest and principal payments in a devalued currency that is worth less than it was when the debt was incurred. In effect, this will be a case of masked taxation – investors in government debt will receive less value when their investments mature.

The conclusion to draw from this discussion is that government indebtedness in Canada is at a much more problematic level than generally acknowledged. An urgent discussion is needed to rein it in.

Data has been sourced from the following:
1. Collective estimated debt of all the municipalities in Ontario, 2016-17:
2. Federal & provincial debt, 2018-19:
3. Canada GDP, 2018: