Canada’s Rising Debt Burden Is Closing the Door on Fiscal Flexibility

October 8, 2026 – With Budget 2026 fast approaching and major new spending pressures on the horizon, Canadian governments face a basic fiscal question: how will they pay for what the country needs when they already have less fiscal room than before past crises?

In Keeping Our Fiscal Powder Dry: Why Rising Public Debt Leaves Canada Less Prepared for the Next Crisis, author Christopher Ragan draws on five premises about public debt, fiscal policy, and public behaviour to show how governments can preserve the capacity to respond to future crises. He warns that Canada is now in a “fiscal complacency” zone in which governments are not facing an immediate fiscal crisis but are failing to do enough to reduce their debt ratios and rebuild the fiscal capacity needed for the next crisis.

“Growing trade, security, and healthcare pressures make it clear new spending is slated for the future. The question is, how are we going to pay for it?” asks Ragan, a Max Bell Foundation Senior Fellow at the Institute for Research on Public Policy.

Past experience shows why flexibility matters. Canada’s fiscal crisis in the 1990's illustrates how quickly pressures can intensify when investors lose confidence. High debt, persistent deficits, and interest rates that exceed economic growth can put debt on an increasingly difficult trajectory and push up government bond yields.

“Reducing debt is difficult because the choices are difficult. Spending cuts can slow the economy, while higher taxes are unpopular and can affect incentives. And even when governments run surpluses, taxpayers soon ask why they are paying more in taxes or receiving fewer services,” says Ragan. “But if we don’t make those choices, rising debt-service costs will leave governments with even less room to act.”

Against this backdrop, the report finds that increasing pressures from defence, trade infrastructure, the energy transition, healthcare, and an ageing population will require governments to confront difficult choices: borrow more, raise revenues, or reduce lower-priority spending to make room for new commitments. Ragan argues that long-lasting spending increases should generally be financed through higher revenues or reductions in lower-priority spending rather than continued borrowing. The report also cautions against assuming interest rates will remain below economic growth, warning that governments have limited control over either variable and that relying on favourable conditions to reduce debt would be a big gamble.

“Canada is not in a fiscal crisis today, and that’s precisely why we should be acting now,” he says. “We need to gradually reduce our debt ratios and rebuild our fiscal room, so governments can borrow and spend when the next crisis hits.”

Read the Full Report

A separate report responding to Canada’s long-standing fiscal challenges, the Institute’s 2026 Shadow Budget by Alexandre Laurin, Don Drummond, and William B.P. Robson is set to be released this fall.

For more information, contact: Christopher Ragan, Max Bell Foundation Senior Fellow,  Institute for Research on Public Policy; Raquel Schneider, Communications Officer, C.D. Howe Institute, 647-805 3918, rschneider@cdhowe.org.

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.

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