Canada’s Debt is Too High to Handle the Next Economic Crisis

January 28, 2025 – Canada’s high debt will limit the use of fiscal policy to offset the impact of our next economic crisis, according to a new report from the C.D. Howe Institute.

In “Canada’s Debt Problem: What Can Be Done? A Report on the Institute’s 2024 Debt Conference,” John Lester and Alexandre Laurin summarize and extend the analysis in the 2024 conference, which sought to determine if Canada has a debt problem.

“The message from the conference is a resounding yes,” according to Lester, a Fellow-in-Residence at the C.D. Howe Institute and former federal government economist. “But if President Trump fulfills his tariff threats, Canada’s debt problem will get worse instead of better,” says Laurin. This will heighten concerns about the sustainability of Canada’s federal and provincial debt, limiting the strength of the fiscal response to a tariff-induced recession.

A key conclusion from the conference, which took place well before the US tariff threats were made, was that Canada’s combined federal-provincial debt should be reduced by 10 percentage points by 2030 to ensure fiscal policy can be used to counter the effects of future economic crises. According to Laurin: “To be confident that the debt target will be achieved, the combined federal-provincial budgetary balance would have to improve by 1.4 percent of GDP, or $43 billion, starting in 2025/26.”

Tax increases harm economic performance, by affecting incentives to work, save and invest, so elimination of public spending that does not provide enough benefits to offset this damage should be the first step in reducing deficits and debt. Identifying wasteful spending will require comprehensive value-for-money assessments. Governments must not take the easy way out by implementing across-the-board spending cuts.

Successful expenditure restraint will also require setting binding multi-year expenditure ceilings to prevent governments from spending revenue windfalls or from increasing spending to improve chances of electoral success. Such expenditure ceilings are in place in 11 OECD countries, including Denmark, Finland, Sweden, and Germany. The authors note Alberta has recently adopted a similar approach.

This conference was one of four on deficits and debt held in Canada over the past 40 years. A clear and consistent message from these conferences is that debt not only constrains fiscal policy flexibility but also shifts the burden of public spending to future generations.

Read the Full Report

For more information contact: John Lester, Fellow-in Residence, C.D. Howe Institute; Alexandre Laurin, Vice-President and Director of Research, C.D. Howe Institute; Lauren Malyk, Manager, Communications, C.D. Howe Institute, [email protected], 416-873-6168

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.