At the end of fiscal year (FY) 2022-2023, the Canadian federal debt reached $1.17 trillion, up 2 percent or $33 billion from fiscal 2021-2022. The twenty-year period between FY 2002-2003 and FY 2022-2023 saw the federal debt increase 2.32 times.

What is federal debt?

The federal debt is the money the federal government owes to its creditors -- individual Canadians and Canadian institutions, as well as, foreign entities who own government debt instruments such as government bonds or entities that lend to the government. Every time the federal government runs a deficit (spends more than it collects in revenue), it has to borrow money to cover the difference. Accumulated deficits are rolled up under the federal debt.

How has Canada’s debt changed?

The period between 1975 and 1985 saw double-digit annual growth in federal debt, while the late eighties and early nineties saw debt continue rising but at more modest levels. Nineteen-ninety-eight kicked off a debt reduction cycle lasting eleven years. The government reduced the federal debt by over $100 billion bringing it down to $457 billion in FY 2007-2008 from $559 billion in FY 1997-1998.

The 2008 Financial Crisis reversed the downward trend, and the federal debt grew modestly each year leading up to the global pandemic. In FY 2020-2021, the debt increased by $327 billion or 45%, mainly due to the financial support the government provided to individuals and employers, as well as, emergency funding for hospitals in response to COVID-19. It’s the single largest annual increase in the federal debt. That year the debt crossed the trillion dollar mark for the first time, reaching $1.04 trillion.

Debt-to-GDP

One of the key metrics used to understand a country’s debt is to look at its debt-to-GDP ratio which compares its debt against its gross domestic product, the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. This metric is used to assess a country’s ability to manage its debt relative to the size of its economy. At the end of fiscal year 2022-2023, Canada's debt was 42.2 percent of GDP, down from 45.4 percent in the previous year.

The chart below shows Canada’s federal debt-to-GDP from FY 1997-1998 to FY 2022-2023. The period between FY 1997-1998 and FY 2008-2009 saw a significant decline in debt-to-GDP, from 61.7 percent to 28.2 percent. The ratio increased slightly following the 2008 financial crisis, rising into the low 30 percent range as the government engaged in stimulus spending to mitigate economic fallout. It remained in the low-thirty percent range for over a decade. During the COVID-19 pandemic, Canada’s debt spiked, reaching 47.5% of its GDP in FY 2020-2021, and falling slightly in subsequent years.

Servicing the debt

Like people with mortgages, car loans, or student loans, the government must pay interest on their debt. Between 1966-1967 and 1978-1979, interest payments accounted for 10-14% of all government expenses. Interest payments as a share of government kept creeping up annually and climbed above 20% of all expenses between FY 1983-1984 and stayed above 20%, peaking at 30% in 1996-1997. The following year marked the beginning of a 22-year stretch of declines in interest payments as a share of total government expenses.