Finance Minister Chrystia Freeland attends a press conference on Parliament Hill in Ottawa, April 19, 2021.PATRICK DOYLE/Reuters
For years now, Canadians have been lulled into believing their country has the lowest debt profile of any G7 country. Finance Minister Chrystia Freeland has consistently touted this argument to justify Ottawa’s massive spending spree since the beginning of the COVID-19 pandemic and the $100-billion stimulus plan her government proposes to roll out as it ends.
“Canada has now, even after the extraordinary spending we’ve had to undertake to fight COVID, the lowest net-debt-to-GDP ratio in the G7,” Ms. Freeland told CTV’s Question Period after tabling her April budget.
Ms. Freeland’s characterization of Canada’s fiscal position has largely gone unchallenged in Ottawa. But the picture is not nearly as rosy as the Finance Minister suggests. The way the federal government calculates Canada’s net-debt ratio is highly controversial and smacks of creative accounting. By including the assets of the Canada Pension Plan and the Quebec Pension Plan in its net-debt equation, Ottawa is taking liberties no other G7 country takes.
A Fraser Institute study released this week found that a third of the $1.5-trillion gap between Canada’s gross and net-debt ratios was the result of Ottawa’s inclusion of Canada Pension Plan (CPP) and Québec Pension Plan (QPP) assets in its calculation of the country’s overall indebtedness. The Vancouver-based think tank questioned this accounting because the assets of the CPP and QPP cannot be used to repay government debt; they belong to Canadians and Quebeckers who have contributed to the plans through payroll premiums.
“Including the assets of the CPP (and QPP) in the country’s net-debt statistics overestimates the value of available financial assets to Canadian governments and in doing so provides an underestimate of the indebtedness of Canada, particularly when compared to other industrialized countries,” wrote the study’s authors, Jason Clemens and Milagros Palacios.
The authors used International Monetary Fund (IMF) data to compare differences between gross and net debt for 2020 in 29 developed countries, and found that the gap between gross and net debt was far bigger in Canada than in any other country.
The IMF defines gross debt as “all liabilities that require future payment of interest and/or principal” by national and subnational governments. Net debt is arrived at by subtracting financial assets held by governments. Net debt is then measured as a percentage of gross domestic product – the value of all goods and services produced – to gauge a country’s overall debt burden.
In 2020, the IMF pegged Canada’s net-debt-to-GDP ratio at 33 per cent – a figure that predates pandemic-related spending that boosts the ratio to about 50 per cent. However, the IMF found this country’s prepandemic gross debt stood at a whopping 118 per cent, a difference of 85 percentage points compared with net debt.
For comparison, the figures for net and gross debt to GDP were 50 per cent and 69 per cent, respectively, for Germany; 103 per cent and 127 per cent for the United States; 104 per cent and 113 per cent for France; and 94 per cent and 104 per cent for Britain.
In most developed countries, public pension funds invest almost exclusively in government debt instruments. For instance, Treasury bonds accounted for all of the US$2.9-trillion in assets held by the U.S. Social Security Administration in 2020. The U.S. government “borrows” from the SSA by issuing bonds that become a liability on the federal balance sheet. But this has no effect on the country’s overall net-debt ratio because the government’s liability is offset by the SSA asset.
On the other hand, the CPP has pursued an “active” investment strategy since 1997 that involves investing premiums in a broad range of debt and equity assets, including the shares of Canadian and foreign companies. Government bonds accounted for only 11 per cent of the Canada Pension Plan Investment Board’s $410-billion in net assets in 2020. Yet Ottawa subtracted the total sum of CPPIB assets from its gross-debt figure in calculating its net debt. It also subtracted the $81-billion in net assets held by the QPP to arrive at its net-debt figure.
“Including the assets of the CPP and QPP without considering the future obligations (i.e., liabilities) associated with the assets further complicates the assessment of Canadian indebtedness,” Mr. Clemens and Ms. Palacios conclude in their study.
Ms. Freeland has painted an at-best misleading picture of Canada’s true debt profile. Comparing apples to apples, we were not top of class in the G7 before COVID-19; Germany was. And we are on track to emerge from the pandemic with one of the highest gross-debt-to-GDP ratios in the developed world. There is no way for Ms. Freeland to sugarcoat that fact.
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