Is Canada Sleepwalking into a Debt Crisis?

Forever Deficits and Fuzzy Math Are Sending Canada Down a Dangerous Path

Rather surprisingly, the April 28th Federal Government’s Spring Economic Update landed with more of a thud rather than the fanfare which might have been expected. The better-than-forecast deficit of $67Bn for 2025-26 (versus $79 Bn expected) failed even to impress the government’s usual boosters. This didn’t stop Prime Minister Carney from congratulating himself, citing strong implementation. Mr. Carney can be forgiven for this. But the improvement wasn’t discipline. It was due to a windfall from surging oil prices, stronger-than-expected growth, and some pension plan accounting trickery. The stark reality is that even with the upward revisions, Canada’s deficit has doubled from last year.

Of course, the excuses are familiar. Uncertainty, the trade war, infrastructure, and defence have been trotted out to justify this year’s deficits and the $50Bn in forever deficits thereafter. But none of it can paper over the fact that Canada has a structural deficit problem.

The Debt Shell Game

There are always reasons to spend someone else’s money. But part of the rationale for abandoning any pretence of a fiscal anchor is the stubborn insistence on using “NET Debt”. This is a fiction. Canada’s net debt figure explicitly counts Canada Pension Plan and Quebec Pension Plan assets as offsets against government liabilities. Your retirement savings used to flatter a politician’s balance sheet. Private pension plans should not be used to offset government liabilities. It is immoral and almost certainly illegal. Unmoved by such triviality, the Federal Government points to its low net debt relative to the G7 as evidence of fiscal headroom. But gross federal debt — the honest number — is on par with the fiscal basket cases in Europe and rising as fast as ever outside a recession.

Hope is a Bad Strategy

Along with shoddy balance-sheet math, rosy government growth projections underpin the deficit and debt forecasts. Everyone seems to agree on 1.1% for 2026. It's optimistic in our view, but fine.

Where it gets dangerous is in 2027, with annual real GDP growth estimates of 1.9%. This is higher than the Bank of Canada’s 1.5% and the Parliamentary Budget Office’s 1.8% estimates. The government’s number rests on two assumptions and a heavy dash of wishful thinking: 0.4% population growth and 1.3% productivity growth. The population math is reasonable. After years of an unhinged immigration policy, population growth will be negative this year and is forecast to rise 0.5%. The productivity growth assumption is not. Canada has not averaged 1.3% productivity growth in more than a decade. In fact, it’s been negative over the past 3 years, and it’s been a paltry 0.2% this year. There is a reason the Bank of Canada has called it a productivity emergency and continues to write about it.

Why is productivity so weak? Because private capital investment per person has collapsed. A decade of hostile industrial policy — excessive regulation, dysfunctional energy policy, uncompetitive taxes — has sent capital elsewhere. The result is capital shallowing. Every Canadian worker has less equipment, less technology, and less productive capacity. Can productivity improve? Yes, but it takes time and targeted investment. You cannot legislate your way to productivity. You have to earn it by making Canada a place businesses want to invest in. Right now, they don’t.

Debt Charges Are Soaring

Debt charges are already one of the fastest-growing line items in the federal budget, and will exceed $55 billion this year — more than Ottawa transfers to the provinces for healthcare, and more than it collects from the GST. Without growth and no impetus to cut spending, it will blow through the forecasts.

The math is simple. Larger deficits mean more borrowing. More borrowing means higher debt charges. Higher debt charges mean larger deficits. It becomes self-reinforcing.

Additionally, Canada does not operate in a vacuum. Globally, bond yields are rising as governments everywhere run unsustainable deficits. This is pushing up Canadian government bond yields. Compounding the risk is that a record share (roughly 42%) of Canadian bonds is held by foreign investors. Foreign capital is not sentimental. When growth disappoints, and deficits persist, or a credit rating agency loses patience, those investors will demand higher yields. Higher yields mean higher debt charges. The loop tightens further.

The real cost is what gets crowded out — every billion spent on interest is a billion not spent on improving Canadian productivity, infrastructure, or the tax relief that might actually attract private investment. Canada is slowly being squeezed into a corner, with less room to respond to the next crisis and a growing share of the budget serving yesterday’s decisions rather than tomorrow’s needs.

Canada’s issue, as ever, is an inability to generate strong, sustainable growth. The only way to do that is through productivity gains. But with little Private CAPEX, and a huge share of Canada's economy and workforce (between 21% and 40%) dependent on government money to pay their salaries, the outlook is not good. A country cannot borrow and spend its way to prosperity. At some point, someone has to actually create the wealth. Right now, that someone is being asked to carry more and more weight.