C.D. Howe economist warns Canada's rising debt limits crisis response capacity
Christopher Ragan argues Canada's federal-provincial debt ratio of 74 per cent leaves less room to borrow when the next recession or emergency hits.
Sources · C.D. Howe Institute
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Canada's combined federal-provincial net debt-to-GDP ratio has climbed to roughly 74 per cent, leaving the country increasingly vulnerable to economic shocks, according to a new analysis from the C.D. Howe Institute, a think tank that advocates free-market policies.
Christopher Ragan, author of the commentary, argues that repeated borrowing from progressively higher debt levels risks undermining investor confidence and raising borrowing costs. He warns that governments may eventually be forced into painful tax increases or spending cuts.
Ragan uses a three-zone framework to illustrate the risk: "fiscal prudence" below roughly 67 per cent, "fiscal complacency" between 67 and 95 per cent, and "forced austerity" above 95 per cent. Canada currently sits in the complacency zone, but the trajectory is concerning. Total provincial debt has risen from about 6 per cent of GDP in 1981 to just under 30 per cent today. The federal ratio increased 44 percentage points from 1981 to 1995, then fell 30 points before the 2008 financial crisis. Since then—following both the 2008 crisis and COVID-19—it has grown 18 percentage points over 15 years.
The precedent is stark: in 1996, the year after Canada hit what Ragan calls the "debt wall," the combined federal-provincial ratio stood at 99 per cent.
Ragan argues geopolitical and economic challenges now require greater spending on defence, trade infrastructure, and economic security—much of which is likely to persist rather than representing temporary crisis response. He recommends governments review existing programs and reduce lower-priority spending to make room for higher-priority commitments while working to bring debt ratios down and preserve fiscal capacity for the next crisis. He presented this analysis at a C.D. Howe Institute conference in May 2024. The source does not specify which spending constitutes "lower-priority," nor does it identify a target debt-to-GDP ratio the government should aim for.
Which government programs does Ragan consider lower-priority spending that should be reduced?
To what debt-to-GDP ratio should Canada aim to restore adequate fiscal capacity?
We'll update this story as answers emerge.
By the numbers
What is Canada's current federal-provincial net debt-to-GDP ratio?
Canada's combined federal-provincial net debt-to-GDP ratio has climbed to roughly 74 per cent, according to analysis from the C.D. Howe Institute.
How much has federal debt grown since the 2008 financial crisis?
The federal debt-to-GDP ratio has grown 18 percentage points over 15 years following both the 2008 crisis and COVID-19.
