A recent study by the Fraser Institute expressed concerns about the current path of Canada’s fiscal policies. The study warned that there was a 44 percent likelihood that the net federal debt-to-GDP ratio would be higher in 2036–37 and a 59 percent chance it will be higher in 2046–47. This would mean that the federal government may fail to adhere to its core fiscal goal.
According to the Fraser Institute, the federal government has committed to gradually reducing federal debt as a share of the national economy over the medium term, but has not accounted for the impact of recessions that would result in larger budget deficits.
The federal debt-to-GDP ratio is a key economic indicator that reflects the connection between a country’s federal government debt and its gross domestic product (GDP), gauging the government’s fiscal health and capacity to fulfill financial obligations. A higher ratio indicates a relatively larger debt compared to economic output, signaling potential fiscal challenges. The Fraser Institute’s study noted that since the COVID-19 pandemic, the federal government has postponed reducing its deficit and continued to revise program spending upward.
The study also pointed out that the federal government’s claims that its fiscal policies will lead to a downward trend in its debt ratio are not credible because it fails to consider the likelihood that future recessions could result in larger budget deficits. Moreover, the combination of a high likelihood that Ottawa will miss its current fiscal goal, coupled with the pattern of abandonment for previous fiscal goals, indicates a lack of sincere initiative by the federal government to hold itself accountable to effective fiscal rules or constraints.
The Fraser Institute study raised concerns about the impact of potential economic downturns such as a recession, which could affect public debt in the future. The researchers stressed the need for the government to evaluate how significant economic downturns could impact public debt and to implement meaningful government spending restraint to keep federal finances in check.