Federal debt: Frequently Asked Questions

This blog post provides information on frequently asked questions regarding Government of Canada debt.

The federal debt (also referred to as the accumulated deficit) is the federal government’s main measure of debt. It is equal to total liabilities, less total assets. The Government’s balance sheet can be found in Public Accounts of Canada 2019, Volume 1, Section 2 - Consolidated Statement of Financial Position. [1] The Public Accounts are prepared by the Treasury Board Secretariat, approved by the Comptroller General and reviewed by the Auditor General.

PBO estimates that on March 31, 2020, the Government’s total liabilities reached $1,227.1 billion, against $521 billion in assets, resulting in federal debt of $706.1 billion. Thus, the measure of federal debt reflects the Government’s “net worth” (that is, total liabilities less total assets).

The Government’s largest liability is market debt, consisting mainly of treasury bills and bonds. Other major liabilities include pension and benefit obligations for federal employees and tax liabilities payable. Major financial assets include taxes owed and financial interest in Crown corporations. Non-financial assets are mainly real property.

Changes in federal debt from one year to another are mainly determined by annual budgetary surpluses or deficits. Therefore, PBO’s projections of federal debt are, by construction based on our outlook for revenues, expenses and the resulting budgetary balance. Any accumulation of federal debt must be reflected in the budgetary balance or other comprehensive income. [2]

Deficits measure the difference between Government’s revenues and expenses in a given fiscal year. When revenues exceed expenses, the Government records a surplus in that period. When expenses exceed revenues, it records a deficit. Deficits are financial flow.

The federal debt (also known as the accumulated deficit) reflects the cumulative sum of surpluses and deficits in all years. [3] The federal debt is a financial stock (the accumulation of financial flows).

The inclusion or exclusion of Crown corporations’ assets and liabilities on the Government’s balance sheet (within gross assets and gross liabilities) depends on corporation type.

Consolidated Crown corporations and some not-for-profit organizations rely on the Government for a portion of their financing. The financial activities of all these entities (including balance sheet items) are consolidated in the Government’s financial statements on a line-by-line and uniform basis of accounting after eliminating significant inter-governmental balances and transactions.

Enterprise Crown corporations are government business enterprises that can raise substantial portions of their revenues on their own through commercial business activity and are therefore considered self-sustaining. They are accounted for using the modified equity method, where the Government records its equity as a financial asset but excludes the corporations’ assets and liabilities from the Government’s own balance sheet.

In general, enterprise Crown corporations’ gross debt is excluded from debts of the Government because enterprise Crown corporations are expected to repay their debt from their own revenues rather than appropriations. However, some enterprise Crown corporations borrow directly from the Government of Canada under the Crown Borrowing Program. [4] These loans from the Government to enterprise Crown corporations are recorded in the Government’s balance sheet as assets. [5]

PBO estimates that Canada’s federal debt was $706.1 billion (30.6 per cent of GDP) at the end of the 2019-20 fiscal year. Based on PBO’s most recent scenario, the federal debt would reach $962.1 billion (44.4 per cent of GDP) by the end of the 2020-21 fiscal year. [6]

To put this amount into historical context, the last time the federal debt-to-GDP ratio was above 44.4 per cent was in 2001-02. This level, however, still remains well below the peak (since the beginning of the series in 1966-67) of 66.6 per cent of GDP reached in 1995-96.

The Borrowing Authority Act requires the Government of Canada to seek parliamentary approval to borrow in debt markets by setting a maximum amount that may be borrowed. The maximum amount defined in the Act combines two debt aggregates: 1) unmatured debt of the Government of Canada, and 2) borrowings of enterprise Crown corporations designated as agents of Her Majesty outside of the Crown Borrowing Program.

Parliamentarians consequently have a debt aggregate on which to vote, which is not explicitly shown in the consolidated financial statements of the Government of Canada, although its components are presented in the Public Accounts of Canada. [7]

1) Market debt consists of marketable bonds, treasury bills, retail debt, Canada bills and medium-term notes issued to supply funds to federal departments, as well as consolidated agent and non-agent Crown corporations. All market debt is recorded as a liability in the Government’s consolidated financial statements, and thus is fully reflected in calculating federal debt. Added to market debt are value adjustments and other obligations to arrive at unmatured debt. [8]

2) Outside of the Crown Borrowing Program, borrowings of enterprise Crown corporations designated as agents of Her Majesty consist of a range of securities including bonds and medium-term notes. These borrowings are not recorded as liabilities in the Government’s consolidated financial statements and thus are not reflected in calculating federal debt. [9]

The borrowings of agent enterprise Crown corporations are expected to be repaid by the corporations themselves through their market activity and they are therefore not included in the Government’s consolidated financial statements.

However, as agents of the Crown, the Government would be liable to repay their debt in the event of default. Therefore, for purposes of the Borrowing Authority Act, government and agent Crown corporation market debt may be interpreted as an aggregate measure of debt for which the Government could be legally held accountable. This measure is sensible as an aggregate level of borrowing from market lenders to be approved by Parliament for purposes of transparency and accountability.

The Government’s stated debt management objectives are to “raise stable and low-cost funding to meet the financial needs of the Government of Canada and to maintain a well-functioning market for Government of Canada securities […which…] involves striking a balance between debt costs and various risks in the debt structure.”

Owing mainly to a large increase in Treasury bill purchases in March and April 2020, roughly 60 per cent of the Government’s debt will mature within 3 years. [10] This is higher than the average (55 per cent) from 2010 to 2020.

Maturing debt is subject to rollover risk—the risk that the Government is not able to issue debt at a cost-effective rate. Bank of Canada analysis suggests that these risks were temporarily elevated in March 2020, but that liquidity has since improved for Government of Canada debt. [11]

Given the Bank’s participation in purchasing the Government of Canada’s debt, rollover risks appear low. Bids for federal debt in April 2020 were more than twice the amounts offered. The April 2020 data suggests demand (2.29 auction coverage ratio) is moderately below the historical average (2.40) but higher than during the 2008 and 2009 global financial crisis. [12] [13] [14]