A new study by the Fraser Institute finds that Canada’s debt is much worse than the Liberal government admits to.
The study found that the statistics the government uses to claim it has the lowest net debt-to-GDP ratio in the G7 are flawed because they count assets that cannot be used to pay off the debt in Canada.
“The study finds that Canada’s relative debt position, instead of being the best of the G7, falls significantly when total debt is measured instead of measuring debt after adjusting for financial assets,” a news release from the Fraser Institute said. “Net debt, which is the measure used by the federal government, offsets a part of the country’s total debt by including financial assets.”
When using net debt as a share of the economy, which refers to indebtedness after financial assets have been subtracted from the total debt, Canada ranks fifth lowest among 32 industrialized countries and the lowest among the G7.
Using total debt as a share of the economy, Canada falls to 26th place out of 32 countries and third lowest in the G7, outperformed by the UK and Germany.
Comparing the two measures, Canada falls 21 places, marking the largest change to its debt rating out of the 32 industrialized countries.
“Gross debt is a fair and accurate measurement to compare Canada’s relative debt ranking to peer countries because it’s an apples-to-apples comparison,” Jake Fuss, the director of Fiscal Studies at the Fraser Institute and co-author of the report, told True North. “Using other measures such as net debt offers an apples-to-oranges comparison because of how public pension assets are treated in Canada from an accounting standpoint.”
He said that the net assets from the public retirement plans, along with other liabilities, are controlled for in gross or total debt-to-GDP ratios, making them a better indicator of Canada’s deficits when compared to the international community’s debt.
The net debt, which Canada uses in reports such as the 2024 federal budget to celebrate its economic success, counts Canada’s Pension Plan and the Quebec Pension Plan as assets.
The report said that due to historic changes to the CPP and QPP in 1996 – unique to Canada compared to most industrialized countries – the pension plans can’t be counted as assets in relation to the deficit because the investments made through those plans cannot be used to pay off Canada’s debt.
“The unique approaches to funding public retiree benefits are critical in understanding the differences between the two measures of debt, and more importantly, why caution should be used in relying solely on net debt to assess Canada’s comparative indebtedness,” the report said.
The changes made under Prime Minister Jean Chretien meant that any surplus from the pension plan would be invested into bonds, equities, private placements and other investments. Most countries, compared to Canada, have “old rules” that require excess funds from government-mandated retirement plans to be invested to pay deficits.
This difference explains why the CPP and QPP are included in international net debt as a share of GDP comparisons. Other countries, such as the U.S., invested in federal treasury securities, while Canada invested in provincial bonds.
“For instance, let us assume that the CPP purchased $1 billion in Government of Canada bonds. The federal government has a liability of $1 billion, and the CPP has an asset of $1 billion in bonds,” the report said. “The gross debt for the federal government would have increased by $1 billion, but its net debt position, which includes the assets of the retirement plan (CPP), would have an offsetting $1 billion in assets.”
According to the study, net assets held in the QPP and CPP, around $716.7 billion in combined assets, accounted for more than a quarter of the $2.7 trillion difference between Canada’s gross and net debt.