OTTAWA — Canadian governments’ total debt — as measured against the size of the national economy — is expected to fall later this year to less than that of any other Group of Seven country except one.
The forecast, produced by the Organization for Economic Co-operation and Development (OECD), marks the latest milestone for the federal and provincial governments since fiscal responsibility ascended to the top rung of the political agenda about a decade ago.
Canada — which had the second-worst debt picture among the G7 industrialized countries just four years ago — has improved its position by one notch each year since then, and is in the process of doing it again this year.
According to the OECD, Canada is expected after this year to have total accumulated debt of 36.9 per cent of its economy, as measured by gross domestic product. That will make Canada’s debt-GDP ratio better than that of France for the first time in more than two decades, and give Canada second place on that score among the Group of Seven industrialized countries.
Canada jumped over struggling Japan in 2000, and over Germany the next year. In 2002, Canada overtook the United States, which has since booked massive new federal deficits and is now expected to reach a debt-GDP level of 48.9 per cent in 2004.
“It really is a good news story [for Canada],” said Dale Orr, an economist and a managing director at Global Insight (Canada) Ltd., an international economic forecaster.
And if recent trends continue, Canada could overtake Britain for the top spot within the next few years.
As of 2002, Britain’s overall debt stood at 28.7 per cent of its economy, while Canada’s was 40.4 per cent. But the OECD’s projections for 2004 forecast a dramatically narrowed gap between the two front-runners. Canadian debt is expected to fall to 34 per cent of GDP in 2004, while Britain’s debt is expected to climb slightly next year to 30.2 per cent.
If the projections are correct, that will mean Canada’s debt-GDP ratio will have been cut in half in less than a decade.
It hit an all-time high of 68 per cent in 1995.
While government spending has picked up dramatically in the past couple of years, the country’s debt-GDP has continued to fall faster than that of most other G7 countries because economic growth here has been stronger.
“It’s our good fortune, but also bad fortune elsewhere,” said a Department of Finance official.
Economists often use the ratio of debt-GDP as a way to measure a country’s debt in comparison with its ability to carry that burden.
The OECD measures a country’s total debt by adding the net liabilities of federal and provincial or state governments and government-funded pension plans. The other half of the equation is nominal GDP, a common method of measuring the total value of a country’s economy, without accounting for inflation.
While economic growth has been strong in Canada, much of the improved debt-GDP ratio can be traced to Ottawa’s surprising success in paying back some of the money it owes.
Ottawa posted a surplus of $8.9-billion during fiscal 2001-02. It has now racked up five consecutive surpluses, and is expected to make it six when final results for the last fiscal year are released within the next couple of months.
The federal government has paid down $46.7-billion in debt over the past five years, although Ottawa’s debt still stands at a staggering $507.7-billion.
Those earlier debt payments are already saving about $3-billion a year in interest charges, Mr. Orr said, and improving Canada’s competitiveness against other countries.
“It’s a pretty big deal,” he said. “You don’t want to be hanging out there with higher debt than other industrialized countries.”
While most provincial governments — surplus-heavy Alberta being the notable exception — have not been as aggressive in retiring debt, their debt-GDP ratios have also fallen because many have been running balanced budgets during times of growth. Many provinces also say they would have been able to retire more debt, except Ottawa improved its own fiscal picture largely by slashing transfer payments to the provinces.
But Canada’s fiscal situation is not without its problems.
The economy has slowed in recent months, and federal government spending has been climbing rapidly over the past couple of years.
In his budget in February, Finance Minister John Manley allocated more money for health care, the national child benefit, daycare, the military, municipal infrastructure and a host of other programs. The proposals amounted to a spending hike of $25-billion — about 20 per cent — over the next three years.
Some of the provinces are also mired in their own fiscal messes. British Columbia is particularly conspicuous among the large provinces because of its twin woes of a sluggish economy and an unhealthy deficit, Mr. Orr said.
And Canada’s improved debt-GDP story is also not as impressive if the review is extended outside the G7.
The most impressive debt pictures are owned by some of the smaller industrialized economies that are not large enough to qualify for the G7.
Eight of the 19 OECD economies — which include the G7 countries — have lower debt-GDP levels than Canada, including Australia, Denmark, Iceland and New Zealand.
As of the end of 2002, four OECD countries have negative debt-GDP levels, which means the values of each of their economies is greater than their debt. Those countries are Sweden (-4.1 per cent), South Korea (-35.8 per cent), Finland (-44.5 per cent) and Norway (-85.2 per cent).