Managing Federal Debt in the Context of COVID-19

20 January 2021, 9:10 a.m.

(Disponible en français : La gestion de la dette fédérale dans le contexte de la COVID-19)

In 2020–2021, the federal government is forecasting a significant budgetary deficit and increase to the federal debt. This is largely a result of decreased revenues and financial supports provided to individuals and businesses during the COVID-19 pandemic.

This HillNote describes federal debt, outlines changes to the debt in 2020–2021, and makes historical, Canadian and international comparisons.

Federal Debt

From an accounting perspective, net federal debt is defined as total liabilities less total financial assets. As of 31 March 2020, the net federal debt was $812.9 billion.

The federal government’s borrowings, primarily through bonds and treasury bills, are considered to be market debt. As of 31 March 2020, the federal government’s market debt was $765 billion.

The amount of interest paid annually on federal debt varies with the size of the debt and interest rates. In 2019–2020, the government incurred $24.4 billion in public debt charges.

Each year, the federal government publishes a Debt Management Strategy and a Debt Management Report that outline how the government manages its borrowings.

The authority to undertake borrowing is granted by the Borrowing Authority Act and Part IV of the Financial Administration Act.

Changes to the Federal Debt in 2020–2021

According to the Fall Economic Statement 2020, the federal government expects that it will have a budgetary deficit of $381.6 billion in 2020–2021 as a result of higher spending and lower revenues.

As of 31 October 2020, the government’s total borrowings were $1,421 billion, which includes $286 billion in borrowing that occurred from 1 April to 30 September 2020. The government forecasts an additional $323 billion of incremental borrowings from 1 November 2020 to 31 March 2024, including $100 billion in new stimulus spending.

The government indicates that it is attempting to lower the annual cost of its debt by issuing long-term debt, such as 10-year and 30-year bonds, at low rates. The share of bonds issued with terms of 10 years or more in 2019–2020 was 15%; the planned share in 2020–2021 is 29%.

Notwithstanding increased borrowing requirements in 2020–2021, lower interest rates have reduced the federal government’s forecasted annual public debt charges by $3.5 billion when compared to the estimate presented in the Economic and Fiscal Update 2019.

Bill C-13, An Act respecting certain measures in response to COVID-19, received Royal Assent on 25 March 2020, and exempted borrowings from the limit set out in the Borrowing Authority Act. The bill authorized the Minister of Finance to undertake borrowings for extraordinary circumstances. This authority ended on 30 September 2020.

Bill C-14, An Act to implement certain provisions of the economic statement tabled in Parliament on November 30, 2020 and other measures, increases the government’s borrowing limit from $1,168 billion to $1,831 billion.

The Role of the Bank of Canada

The Bank of Canada purchases Government of Canada securities to support market functioning and provide monetary stimulus. By lowering long-term interest rates, the bank encourages borrowing and spending in the economy and helps move the economy toward full capacity.

In April 2020, the Bank of Canada began a program of quantitative easing, which involved buying a minimum of $5 billion of Government of Canada bonds per week, as shown in figure 1. It has since reduced its purchases.

According to the Bank of Canada, these purchases do not mean that it is financing government spending and debt at no cost, because the federal government will have to repay the securities when they are due (e.g., by selling new securities to investors other than the Bank of Canada or by generating net cash surpluses).

Moreover, the Bank of Canada does not believe that its quantitative easing program will generate high inflation rates because the Canadian economy currently faces low inflation, and its decision on when and how to scale back quantitative easing will be tied to the outlook for inflation.

Figure 1: Bank of Canada’s Holdings of Government of Canada Direct and Guaranteed Securities, 2019 and 2020 ($ millions)

The figure shows the Bank of Canada’s holdings of Government of Canada direct and guaranteed securities as being fairly constant at approximately $105 billion from January 2019 to March 2020. In April 2020, the holdings began to rise steeply, reaching approximately $340 billion in September 2020, with a more gradual increase to approximately $370 billion in December 2020.

Note: Government of Canada Direct and Guaranteed Securities include treasury bills, Government of Canada Bonds, Real Return Bonds and Canada Mortgage Bonds.
Source: Figure prepared by the author using weekly data from the Bank of Canada on its assets and liabilities.

Comparing Debt Levels

To provide context for the current level of federal debt, it can be useful to compare it historically, within Canada and internationally.

A. Historical

To provide a sense of the relative size of the federal government’s debt, it is often compared to the country’s gross domestic product (GDP), as shown in Figure 2.

Figure 2: Government of Canada Debt as a Percentage of Gross Domestic Product, 1870 to 2025

The figure shows how the Government of Canada’s debt as a percentage of GDP has varied considerably since 1870. It reached a peak of 108% in 1948. More recently, a peak of 66% was reached in 1995. The government projects that its debt will increase from about 30% of GDP in 2019 to 52% in 2020, before declining to 49% in 2025.

Sources: Figure prepared by the author using data from Department of Finance Canada, Fiscal Reference Tables 2020, Fall Economic Statement 2020 and Statistics Canada, Table 10-10-0048-01 (1870-1966) for the debt. For GDP, data was obtained from M C. Urquhart, New Estimates of Gross National Product, Canada, 1870-1926: Some Implications for Canadian Development, and Statistics Canada, tables 36-10-0201-01 (1926-1980) and 36-10-0221-01 (1981-2019).
Note: Debt in this figure is defined as accumulated deficit, which is the difference between total liabilities and total assets. The data is not strictly comparable over time due to changes in the methodology for determining GDP and debt. The projection does not include planned stimulus spending.

The relative burden of the government’s debt load can be demonstrated by comparing public debt charges to revenues, as shown in figure 3. Public debt charges are forecasted to represent 7.3% of federal revenues in 2020–2021.

Figure 3: Government of Canada Public Debt Charges as a Percentage of Revenues, 1867 to 2025

The figure shows how the Government of Canada’s debt charges as a percentage of revenue have varied considerably since 1867. Debt charges reached a peak of 43% of revenues in 1932. Another peak of 38% was reached in 1991. The government projects that its debt charges as a percentage of GDP will remain fairly stable at approximately 7% over the next five years.

Sources: Figure prepared by the author using data from Statistics Canada, Historical Statistics of Canada and Department of Finance Canada, Fiscal Reference Tables 2020 and Fall Economic Statement 2020.

B. Provincial and Federal Governments

The 2020 economic downturn has led jurisdictions across Canada to revise their forecasts for the relative sizes of their debts. Figure 4 presents provincial and federal government expectations for net debt-to-GDP ratios as outlined in their 2019 budgets for the end of fiscal year 2019–2020 (blue), as well as projections made for fiscal year 2020–2021 (orange), as outlined in 2020 fiscal updates.

Figure 4: Provincial and Federal Debt as a Percentage of GDP, as of March 2020 and March 2021

The figure shows provincial and federal government expectations for their net debt as a percentage of GDP as outlined in 2019 budgets and 2020 fiscal updates. Saskatchewan projects it will have the lowest net debt to GDP ratio of approximately 20%, as of 31 March 2021, followed by Alberta at 21%. Newfoundland and Labrador projects it will have the highest net debt to GDP ratio of approximately 57%, followed by the Government of Canada at 51%.

Sources: Figure prepared by the author using data from provincial and federal budgets and fiscal updates.
Note: Provincial governments provide forecasts of their net debt. The federal government provides forecasts of its accumulated deficit (i.e., net debt minus non-financial assets).

C. International

Government debt in Canada can also be compared to other countries with advanced economies. The International Monetary Fund (IMF) collects and interprets data on general government gross debt for a variety of countries. As shown in Figure 5, it also made projections for how government debt would be affected by the COVID-19 pandemic in 2020.

Figure 5: General Government Gross Debt of Selected Advanced Economies as a Percentage of GDP, 2019 and 2020

The figure shows estimated general government gross debt as a percentage of GDP for ten advanced economies in 2019 and 2020. Canada is in the middle with a projected gross government debt to GDP ratio of 115% in 2020. South Korea is the lowest, with a ratio of 53% in 2020, followed by Australia, with a ratio of 64%. Japan is estimated to have the highest gross government debt to GDP ratio of 266% in 2020, followed by Italy at 162%.

Source: Figure prepared by the author using data from the IMF, World Economic Outlook, June and October 2020.

Author: Alex Smith, Library of Parliament