Tracking Deficits: 2026 Canadian Edition

  

Along with the release of the federal budget last week, there also appeared the 2026 edition of the Fiscal Reference Tables. While there is much about the workings of the Canadian federation in this fiscal resource to digest, of particular interest are the numbers with respect to deficits.  As we appear to have embarked on a new era of large deficits at both the federal and provincial levels, it is only natural that we take a retrospective look at deficits in our fiscal history.

 

Figure 1 plots the federal and provincial-territorial deficits for the fiscal years from 1990/91 to 2025/26.  The best year for the federal government – the largest surplus – was 2000/01 which saw a surplus of $19.9 billion while the worst year – the biggest deficit – was of course the pandemic year of 2020/21. When one examines the combined provincial-territorial deficits, the best year was 2006/07 at a surplus of $18.5 billion while the worst year was again the 2020/21 pandemic year at -47.7 billion. 

 

Figure 2 plots the combined federal-provincial-territorial deficit by fiscal year as well as the total as a percent share of GDP. The best year for a combined surplus was 2006/07 at $32.2 billion, and the largest combined deficit was again the 202/21 pandemic year. As a share of GDP, the worst year was again 2020/21 at -17 percent while the best combined year was a surplus of 3 percent of GDP achieved in 2000/01. 

 

Also, of importance is what the accumulated deficits of these respective governments are.  Figure 3 plots the accumulated deficits over the 1990/91 to 2025/26 period and the grand total over this 36-year period for the federal government is $957.9 billion while for all the provinces and territories combined it is $315.9 billion.   However, there are some fiscal entities that managed to accumulate a surplus over the long term.  Alberta managed an accumulated surplus since 1990/91 of $4.1 billion while the Yukon, Northwest Territories and Nunavut (only from 1999/00 to 2025/26) all managed an accumulated surplus ranging from $677 million for the Yukon to $1.9 billion for Nunavut.

 

Finally, Figure 4 takes the 36 fiscal years and presents the percentage of those years in which a deficit was incurred.  The federal government ran a deficit 69 percent of the time.  The provinces and territories had a rather varied performance ranging from a high for Ontario -the “winner” at 83 percent of fiscal years with a deficit – to a low of 4 percent for Nunavut which appears to be a model of fiscal rectitude when it comes to its budgets.  Nova Scotia and Alberta are the best provincial performers in terms of years without a deficit.  After Ontario, Prince Edward Island and Newfoundland and Labrador are the worst performances with deficits 75 percent of the time. 

As for government debt, that is another story for another time.   

Ontario Fall 2026 Economic and Fiscal Statement: Is This as Good as it Gets?

 The Ontario provincial government released its fall economic and fiscal update with its projections for the next few years and the results do not look like smooth sailing.  Ontario is of course being hard hit by the ongoing trade and tariff dispute with the United States with its manufacturing sector under a lot of stress. While the Ontario economy is still being forecast to grow over the new few years - demonstrating a surprising amount of resilience - it remains that once inflation and population growth are factored into the analysis, Ontario is looking at continuing anemic per capita income growth.  By 2028, if all goes as laid out in this economic statement, Ontario will have a real per capita GDP approximately where it was in 2019.  In other words, the third decade of the 21st century will represent a lost decade when it comes to per capita income growth for Ontarians.

 

In an effort to deal with the effects of a slow growing economy, Ontario is relying on continued large deficits.  Figure 1 combines data from the Fiscal Reference Tables and yesterday's economic statement to plot total revenues, total expenditures and the deficit since 1990/91 and up to 2028/29.  Needless to say, more often than not, there has been a deficit with the projections calling for a deficit of $16.9 billion in 2026/27 followed by $12.7 billion and $6.7 billion in the two subsequent years.  Even if one accounts for the billions of dollars in spending being set aside in contingency funds ($2.2 billion in 2026/27 and $3.6 billion in 2027/28), there are still substantial deficits coming down the road.  

 

By 2028/29,  the provincial net debt is expected to surpass the $540 billion dollar mark (see Figure 2) but also growing quickly will be the resources required to service the debt.  Annual debt service costs until the 2022-243fiscal year were under $14 billion  but are projected to rise substantially to the point that 2028-29 is expected to see debt charges surpass $20 billion dollars.  That is about $7 billion more than what the province is expected to spend on post-secondary education in 2028/29 ($12.6 billion) and just under what it is expected to spend on children, community and social services ($21.7 billion).  And while we are on the topic of post-secondary education, it should be noted that the economic statement shows spending on the sector at 13.9 billion for 2025-26 meaning that by 2028/29, spending on the sector will have declined by 9.4 percent. 

 

However, the most interesting revelation is for health spending.  Figure 3 plots the total amount the provincial government is spending on health as well as adjusted for both population and inflation. Going forward, increases will be about $3 billion annually in total health spending which after factoring in inflation and population growth will result in increases in real per capita spending of 0.5 percent in 2026/27, -0.2 percent in 2027/28 and 0.7 percent in 2028/29.  By 2028/29, real per capita provincial government health spending will have essentially been flat since the surge of the pandemic. The pandemic itself saw a substantial bump in real per capita spending followed by a decline and then a slow recovery which flattens out going forward over the next three years.  All this in turn comes after a period of essentially flat real per capita health spending since 2008/09. By way of comparison, from 1997/98 to 2008/09, real per capita provincial government health spending growth in Ontario averaged 4.1 percent annually. Since then and projected to 2028/29, the average annual growth rate will be 0.8 percent. 

 

Of course, part of the reason for slow spending growth in important things like health and large deficits at the same time is the anemic performance of the provincial economy and Figure 4  shows where we have been and where it looks like we are going. Much like health spending, projected real per capita GDP by 2028/29 will  be where Ontario was just before the pandemic. A slow economy feeds into revenue growth. The result is that while revenues are projected to increase, they are not rising fast enough to both increase spending on key programs, service the debt and balance the budget.  Between 2025/26 and 2028/29, total revenue is expected to grow by 11 percent.  Program spending is expected to rise by 6 percent.  However, debt service costs are going to rise by 32 percent.  And with interest rates on the way up, it looks like this is going to be as good as it gets.

Federal Finances in Review

 

The last week has been a chaotic one in Ottawa given the resignation of the finance minister on the eve of the Federal Economic and Fiscal Statement (FES), the turmoil over the Prime Minister’s leadership and the ongoing verbal assaults of President-elect Trump on Canadian sovereignty.  Nonetheless, lost in all of this is that after a considerable delay, there has finally been an update to Canada’s Fiscal Reference Tables (FRT) and Figures 1-4 here provide an overview of both the past (1966-67 to 2023-24) as laid out in the FRT and the future (2024-25 to 2028-29) such as it is laid out in the FES. 

Figure 1 provides a nice snapshot of the federal fiscal footprint – the federal spending to GDP ratio. Over the period of this chart, the federal footprint reached a  maximum of 25.6 percent in 2020-21 during the pandemic. This was of a course an outlier year and if one takes this out, one nevertheless notices that from a low of 13.9 percent in 2013-14, the federal fiscal footprint has gradually drifted upwards notwithstanding the pandemic and in 2022-24 stood at 17 percent.  While not at the level of the 1980s when it exceeded 20 percent, it remains that the federal fiscal footprint both in 2023-24 and going forward to 2028-29 is the largest it has been since the late 1990s and marks a calculated expansion of federal public sector size relative to GDP.

 

 Part of this rising expenditure has been financed via borrowing and in 2023-24 the deficit stood at nearly $62 billion.  From 2023-24 to 2028-29, Canada is forecast to accumulate another $242 billion dollars in deficits bringing the national net debt to $1.549 trillion by 2028-29. Figure 2 plots the deficit to GDP ratio, and it stands at nearly 2 percent for 2023-24 and is forecast to drop to 0.7 percent by 2028-29 – assuming of course that given the deficits projected, nominal GDP growth proceeds at 4 percent annually.  Given the slowdown in the economy that appears to be underway and the likely imposition of US tariffs in 2025, this would appear to be an exceptionally rosy GDP growth forecast.

 

 Figure 3 plots the net debt to GDP ratio, and it began to take a definite upward path starting in 2019-20 when it went to 37 percent from 33 percent the year previous.  It peaked at just over 44 percent in 2022-23 and is only going to come down slowly to about 42 percent by 2028-29.  Now, while up by recent standards, it is nowhere near where it was during the federal fiscal crisis of the 1990s.  Yet, the debt is mounting, and interest rates are higher than they were during the debt and spending spiral of the pandemic and so debt service costs have gone up.

 

 In 2019-20, debt service costs were $24.4 billion representing about 7 percent of federal revenues that year.  For 2024-25 they are anticipated to be more than double at $53.7 billion or 10.8 percent of federal revenues.   By 2028-29, it is projected that annual debt service costs will reach $66.3 billion or 11.3 percent of federal revenues.  As Figure 4 illustrates, we are again nowhere near the numbers of the federal fiscal crisis when well over 30 percent of federal revenues went to service the debt. At the same time, we appear to have settled at a plateau over 10 percent for the foreseeable future and that is money better spent on programs.

 

 In her resignation letter, the outgoing finance minister appeared to have a fiscal epiphany as she noted the need to keep our fiscal powder dry to face the economic challenges coming down the pipeline.  The trends of the last few years suggest that there has been a certain dampness to federal fiscal powder for the last few years that is expected to persist into the future.  While there is still fiscal room to manoeuvre, a large recessionary shock will quickly erode that room given the gradual enrichment of long-term  federal spending via assorted initiatives over the last decade as illustrated by the federal expenditure to GDP ratio. This suggests that dealing with a major recession will be more challenging that it would have been a decade ago.

 

 

Global Aftermath: The Economic and Fiscal Effects of COVID in Canada and the World

 

The write-up accompanying my report on COVID in Canada and the world released today by the Fraser Institute.  The full report is available here.

 

— Published on May 11, 2023 Fraser Institute

The economic and fiscal disruption and associated effects of the pandemic in Canada and around the world were severe and unprecedented. The general effects of the pandemic were to disrupt health, social, governmental, and economic systems. While the impact of the pandemic on Canada and the world was similar, variations in demographics, timing of the spread and response, and other characteristics have meant that the effects on health, the response, and the economic and fiscal impacts have varied across countries.

At 103,874 total cases per million population by June 2022, Canada performed remarkably well: incidence was the fourth lowest among the IMF Advanced Economies. Moreover, of the IMF Advanced Economies, Canada was 27^th out of 38 at 1,103 deaths per million population; Japan was the lowest at 248 total COVID-19 deaths per million population. Canada did not fare as well for crude COVID mortality: its rate of 1.1% is the second highest of the IMF Advanced Economies. As for responses to the pandemic, at 227 vaccinations per 100 population, Canada had the 7^th highest vaccine uptake rate of the IMF Advanced Economies and the 3^rd highest level of stringency in its responses to the pandemic as measured by the Oxford University’s COVID19 Government Response Tracker.

Impact on the economy

Canada’s estimated real per-capita GDP growth was negative and the country ranked 29^th out of 40 IMF Advanced Economies and had the second-worst performance of the G7 countries over the period from 2019 to 2022. Canada, during the first pandemic year, had the second worst employment drop of the IMF Advanced Economies at 5.1%, coming in just ahead of the United States. However, during the rebound in 2021, Canada had the second highest employment growth of the IMF Advanced Economies. Canada’s unemployment rate in 2020 of 9.6% was higher than the world average (9.2%), the G7 average (6.6%), and the average for the IMF Advanced Economies (6.3%). According to the International Monetary Fund’s inflation estimates for 2021, Canada was mid-ranked (19^th highest) amongst the IMF advanced economies. However, a particularly high proportion of Canada’s inflation appears to be linked to demand-side rather than supply-side factors. As well, Canada ranked 9^th out of 30 OECD comparator countries for the size of the increase in housing prices.

Overall, Canada’s performance in controlling COVID-19 incidence and vaccine uptake was good but this was accompanied by lower testing rates for COVID as well as higher crude mortality rates. In terms of economic performance, Canada did not fare well in per-capita GDP growth during the pandemic; employment growth was also low, though this did improve in 2021. Canada was also generally mid-ranked for inflation compared to the IMF Advanced Economies, though it appears to have had a higher proportion of its inflation driven by demand-side factors. Canada’s success in some aspects of dealing with COVID appears to have come at an exceptionally high price, particularly from negative short-term employment effects and weaker per-capita GDP growth.

Impact on the fiscal situation

In 2020, of 194 IMF countries, at an increase of government expenditure of 19.7%, Canada ranked 25^th highest in the world for spending. This increase of nearly 20% was well above the world average of approximately 9%, the G7 average of 13%, and the average of the IMF Advanced Economies of nearly 11%. Canada also averaged a 2.2% drop in general government revenue in 2020 according to the IMF, not as severe as the average drops for either the IMF Advanced Economies or the G7.

The world saw its negative fiscal balance widen from 3.6% in 2019 to over 10% in 2020 before starting to decline to under 8% in 2021 and to just over 5% in 2022. According to the IMF, Canada initially saw a negative fiscal balance of about 11% in 2020 from a balance of close to zero in 2019. The fiscal balance for 2020 was later revised to 11.4%, with a revised forecast of 4.7% in 2021 and 2.1% in 2022.

Globally, from 2019 to 2021, the average gross debt-to-GDP ratio rose from 57% to 67%. All together 161 out of 196 countries—nearly 80%—saw an increase in their gross debt-to-GDP ratios from 2019 to 2021. Canada saw its gross debt-to-GDP ratio increase by nearly 25 percentage points from 2019 to 2021, the 15^th largest increase in the world. It is worth noting that, of the increased government debt accumulated in Canada during the pandemic, much was incurred by the federal government rather than the provincial governments.

Canada’s fiscal response was especially large and driven mostly by the federal response. In some respects, the ability of Canada to ramp up its fiscal response in time of need reflects its long-term prudent fiscal management and resulting low debt-to-GDP ratio achieved in the decades after the federal fiscal crisis of the 1990s. At the same time, the size of the deficit and fiscal response during the pandemic should not be allowed to become a long-term feature of the public finances given the recent rise in interest rates, especially as it limits the ability and fiscal flexibility for responses to future events.