Although Canada’s main parties have touched on the topic of the country’s increasing debt, it hasn’t so far been a main focus of the election campaign.
And while the U.S. tariffs on Canadian products may be getting most of the attention on the campaign trail—and as the tariffs add to the challenge of balancing the budget in Canada—the Trump administration itself has made debt reduction a priority and has even created a new department to help achieve that by cutting spending.
Assessing the Debt Level
Large levels of debt, especially at times of higher interest rates, mean governments have less money for tax cuts or for spending on support programs.
Canada’s combined federal and provincial inflation-adjusted debt has risen from $1.2 trillion just before the financial crisis of 2007–08 to a projected $2.3 trillion in 2024–25, according to a recent report by the Fraser Institute. The rise in debt is driven by the increase in government spending, the report says.
Spending rose dramatically during the COVID-19 pandemic, amounting to a deficit of $327.7 billion in 2020–21 followed by $90.2 billion in 2021–22.
Although the two subsequent federal budgets attempted to lower government spending, Ottawa still posted a $35.3 billion deficit in 2022–23, followed by $61.9 billion in 2023–24, which blew past the government’s $40.1 billion guardrail.
The Fraser Institute says COVID can’t be entirely blamed for the ballooning debt, as Canada’s combined federal and provincial debt grew by nearly $600 billion between 2007–08 to 2019–20.
The government says in its Fall Economic Statement that Canada’s deficit-to-GDP ratio is performing well when compared to other G7 nations, using metrics provided by the International Monetary Fund (IMF).
According to the IMF figures, Canada is doing better compared to all but one of the other six countries on the “general government deficit-to-GDP ratio,” which includes the federal, provincial/territorial, and local and indigenous government sectors as well as the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP). The IMF indicates a 2.0 percent deficit-to-GDP ratio for Canada, tied with Germany, and a 7.6 percent ratio for the United States.
As for government debt as a percentage of GDP, the Fall Economic Statement presented IMF projections based on net debt. The statement said Canada’s projected debt-to-GDP ratio for 2024 was just 14.4 percent, which is “well below the average of other G7 countries” at 103.8 percent. For the United States, the IMF figures show a projected net debt-to-GDP ratio of 98.8 percent.
However, Jack Mintz, president’s fellow at the School of Public Policy at the University of Calgary, says there’s a “problem” with using net debt. He says that when compared to gross debt, the net debt metric underestimates the level of indebtedness by ignoring future pension liabilities.
Gross debt includes all liabilities at a specific point in time that require payment of interest, principal, or both at one or more future dates, such as loans, bonds, and CPP and QPP pension obligations, according to the IMF.
Meanwhile, net debt is a narrower measure that’s calculated by taking the gross debt and subtracting financial assets that could be liquidated to repay that debt. These assets include currency deposits, gold reserves, and particularly the invested CPP and QPP funds that correspond to the pension obligations themselves, which Mintz referred to.
When using gross debt as the metric, the federal gross debt is expected to have nearly doubled between 2014–15 and 2024–25, growing from $1.1 trillion (53 percent of GDP) to $2.1 trillion (nearly 70 percent of GDP), according to a Fraser Institute bulletin published in September 2024.
Meanwhile, the Conservatives are putting the attention on another GDP-related metric, the GDP-per-capita, saying Canada ranks second-last compared to other OECD (Organisation for Economic Co-operation and Development) countries.
A number of provincial governments have also seen increasing debt levels, with Alberta expecting a $5.2 billion deficit in 2025–26 after a $5.8 billion surplus in 2024–25, and Newfoundland and Labrador projecting a $152 million budget shortfall in 2024–25
In February 2024, former Parliamentary Budget Officer Kevin Page noted in a report in Policy Magazine that the federal government’s financial situation was “not as bad as [that in] the 1980s and early 1990s, but we have lost a lot of fiscal room.”
“It is room that is needed to support Canadians in future global crises,” Page wrote. “Fiscal room may best be found by reducing spending.”
Carney and Poilievre on Debt
Liberal Leader Mark Carney (L) and Conservative Leader Pierre Poilievre. The Canadian Press
On the campaign trail, the two leading parties have pledged tax cuts, increasing defence spending in the face of Trump administration pressure on meeting NATO commitments, and maintaining support programs—and in some cases increasing them, but to differing degrees.Liberal Leader Carney has said he is proud of the support programs of the Liberal government such as the $10-a-day daycare and pharmacare, and has announced an expansion to the dental care program.
During the Liberal leadership campaign, Carney raised concerns about Ottawa consistently exceeding its spending targets and the federal workforce growing some 40 percent since 2015. He has said his plan involves separating the federal government’s operating and capital budgets, making major changes to each, and balancing the operational budget within three years.
He pledged to “spend less and invest more” by capping the size of the federal public service, reviewing program spending to maximize outcomes, and using technologies like AI and machine learning to make the public service and programs more efficient. He has said this will be done through a new ministry called the Department of Government Transformation.
Carney also said he would run a “small deficit on capital spending that aligns with our fiscal capacity.” He indicated he would not raise taxes but would instead consider a middle-class tax cut while also ensuring the government debt-to-GDP declines. He said the official costings of this plan would be revealed once he became Liberal leader.
Carney subsequently announced a 1 percentage point reduction to the lowest tax bracket on March 23 when he launched the Liberal election campaign after triggering a snap election for April 28. He has also said he would eliminate the GST for first-time homebuyers on homes costing up to $1 million.
Carney told reporters on March 24 that he plans to pay for new spending commitments and compensate for the loss of taxes by focusing on “productivity in government” and using taxpayers’ dollars to “catalyze huge private investment” in projects like “clean and conventional energy” and trade corridors. He also noted that government spending has been growing by around 9 percent each year, and by stopping that growth, more funding would be freed up.
Conservative Leader Pierre Poilievre, for his part, has vowed to “fix the budget” of the federal government by ensuring that every new dollar of spending is accompanied by a dollar in savings.
“A new dollar of spending would have to be matched with a dollar of savings. Do you want to spend more over here? You have to spend less over there. And that will be passed into law. The dollar-for-dollar law,” Poilievre said.
In the past, the Conservatives have been critical of the childcare and pharmacare support programs, questioning their effectiveness and saying they should be left to the provinces, and avoided declaring a position on the dental care program.
This week, however, Poilievre said he would “protect” the pharmacare and dental care programs and ensure “no one who has them will lose them.”
While campaigning, Poilievre also promised a tax cut in the lowest tax bracket by 2.25 percent. On March 26, the Tories promised tax cuts for seniors, raising the income tax-free limit for those 65 or older by $10,000 to $34,000. The party has also said it will eliminate the GST on new homes up to $1.3 million.
To compensate the loss of revenue, the Conservatives said they will cut bureaucracy, consultants and outsourcing, corporate subsidies, and foreign aid, noting that the size of the public service could be reduced simply by not replacing the more than 17,000 employees who leave their jobs each year.
Tariffs Adding to the Challenge
A worker at a steel plant in Hamilton, Ont., on March 12, 2025. Nathan Denette /The Canadian Press via AP
While the spending programs announced on the campaign trail will add to the challenge of balancing the budget, the U.S. tariffs will also add considerable pressure.
A Scotiabank report published last November said the U.S. tariffs and Ottawa’s counter-tariffs of the same amount could cause inflation to rise by 4.1 percent in the third quarter of 2025 and the unemployment rate to rise by 3 percent in the fourth quarter of 2025, while Canada’s GDP could be as much as 5.6 percent lower in the first quarter of 2027.
Ottawa has said it will use the revenue from retaliatory tariffs to support Canadians and businesses harmed by the trade war. Similar to the COVID-19 pandemic, the government may dramatically increase spending for tariff-relief assist programs.
While the Bank of Canada has decreased interest rates seven consecutive times since last June, a recent Organisation for Economic Co-operation and Development report said that inflation caused by the tariffs could force the central bank to raise interest rates by up to 1.25 percentage points. With the country’s annual inflation rate coming in unexpectedly hot in February, at 2.6 percent, the bank may already be deciding against future rate cuts.
If the central bank is forced to again increase interest rates, the cost of government borrowing would increase and more of Ottawa’s budget would go toward interest payments on its debt rather than programs and services. This would give the government even less fiscal room, especially as reduced business profits result in lower tax revenue.
Richard Diaz, global macro strategist at PGM Global in Montreal, said he believes neither of the two parties will be able to notably cut spending in order to reduce Canada’s debt, given that U.S. tariffs on many countries have also raised fears about a coming recession.
“There’s zero appetite for austerity,” he said in an interview with The Epoch Times.
DOGE estimates that it has achieved US$130 billion in savings as of March 24, and the program’s lead, Tesla CEO Elon Musk, projects that it will eventually reach US$1 trillion in savings. However, given that the country’s deficit was US$1.83 trillion in fiscal year 2024 and has already hit US$1.15 trillion in fiscal 2025, the savings from the program so far are a proverbial drop in the bucket. The U.S. fiscal year for the federal government runs from Oct. 1 to Sept. 30.
To achieve further savings, the United States would need to either increase taxes or target larger spending items like social security (making up 21 percent of government spending), Medicare (15 percent), national defence (13 percent), or health care (13 percent).
The new U.S. administration also sees tariffs as a way of bringing in additional income and is looking at creating a new government agency called the External Revenue Service to collect tariffs, duties, and other revenues related to foreign trade.
In Canada, of the estimated $432.9 billion in planned government spending in 2023–24, 60 percent ($261.4 billion) was money transferred to other levels of government, individuals, and other organizations, while government operating and capital costs accounted for 31 percent ($133.7 billion), and interest payments on public debt accounted for 9 percent ($37.8 billion).
Of the $261.4 billion transferred out, elderly benefits accounted for $76.6 billion and Canada Health Transfer payments accounted for 49.4 billion.
