> ## Content Index
> Fetch the complete content index at: https://www.borealian.ca/llms.txt
> Use this file to discover other available public pages before exploring further.

# Is Canada steering toward a debt crisis?
- URL: https://www.borealian.ca/canada-debt-path-g7-fiscal-room/
- Published: 2026-10-16T01:36:41.000Z
- Updated: 2026-10-21T05:25:02.000Z
- Description: In 2026, Canada will spend more on servicing its debt than it does on healthcare. Yields are rising, and every federal target since 2024 has slipped. We may not be in crisis now, but the future is less optimistic.
- Author: Innis
- Tags: In Focus, Economics

Let us be clear: Canada is not in a sovereign-debt crisis, yet. It has missed no payment, restructured no finances, frozen no bank deposits, and all four of the big rating agencies still give Ottawa AA+ or above. My argument is about direction. The G7 is building a debt problem, and Canada is on a path toward a crisis due to the current government's reckless spending that keeps eliminating the fiscal room that would push a crisis away. Moreover, this specific government continues to move its fiscal anchors every time it blows past them, pretending like nothing is wrong. As interest rates start to climb, the economy continues to stagnate; this fiscal theatre can only last for so long. Ottawa needs to kick its addiction to structural deficits before time runs out, and Canadians are left hurting. 

## What a crisis would look like

Words like "crisis" are often overused in fiscal arguments, so let me present a definition we can work from. Carmen Reinhart and Kenneth Rogoff, whose [history of financial crises](https://www.nber.org/system/files/working%5Fpapers/w13882/w13882.pdf?ref=borealian.ca) is the standard reference, define a sovereign default as "the failure to meet a principal or interest payment on the due date (or within the specified grace period)." They also count debt "extinguished in terms less favourable than the original obligation," and, for domestic debt, "the freezing of bank deposits and/or forcible conversions of such deposits." To date, Canada has done none of these things.

The International Monetary Fund sets a different bar for countries that borrow freely in markets. Under its [debt sustainability framework](https://www.imf.org/en/about/faq/mac-dsa?ref=borealian.ca), debt is sustainable with high probability when the chance of unsustainable debt is "strictly below 20 per cent," and it is unsustainable when that chance passes 50 per cent. No IMF finding of probable unsustainability exists for Canada. I add a market test of my own: a crisis has arrived when a government loses easy access to its bond market, or when its central bank must step in to buy its bonds to stop a rout. That has not happened here either.

So I set out five thresholds, and Canada passes each one today. A downgrade would be the early warning, and Canada has seen their credit rating fall from AAA to AA+ in June 2020\. The case I am making is that the margin above those thresholds is shrinking, and that Ottawa is choosing to let it shrink.

## The room is being spent

Fiscal room is the gap between what a government can borrow cheaply and what it already owes. It works like the cushion a household keeps in its line of credit.

The [Parliamentary Budget Officer](https://www.pbo-dpb.ca/en/publications/RP-2627-002-S--economic-fiscal-outlook-june-2026--perspectives-economiques-financieres-juin-2026?ref=borealian.ca), Parliament's independent fiscal watchdog, projects that federal debt charges will take 13.1 per cent of federal revenue by 2030-31, up from 10.5 per cent in 2024-25\. The PBO calls that share the *debt service ratio*. The government's own path in its [Spring Economic Update](https://budget.canada.ca/update-miseajour/2026/report-rapport/anx1-en.html?ref=borealian.ca) is nearly identical, and the PBO's [assessment](https://www.pbo-dpb.ca/en/publications/NT-2627-002-S--pbo-assessment-spring-economic-update-fiscal-anchors-fiscal-sustainability--evaluation-dpb-mise-jour-economique-printemps-cibles-budgetaires-viabilite-financiere?ref=borealian.ca) of the update described the debt projection as "still showing a concerning upward track."

First, Ottawa runs deficits, so the stock of debt grows. Then, as old bonds mature, they are refinanced at today's higher yields. Finally, each extra dollar of interest is a dollar that cannot go to health care, defence or tax relief.

The government's economic update projects public debt charges of $58.7 billion in 2026-27\. To get a sense of scale, compare that to the Canada Health Transfer, the main federal payment to provinces at $57.4 billion. This is the first year in the update's projection that Ottawa will pay more to its bondholders than it spends on healthcare. By 2030-31 the gap widens to $80.9 billion in debt charges against $67.5 billion for the health transfer.

The deficits behind those charges are not shrinking either. The update projects a $65.3 billion deficit in 2026-27 and $53.2 billion still in 2030-31\. Federal debt rises from $1,333.9 billion in 2025-26 to $1,629.4 billion over the same span. The PBO's own projection is more pessimistic, with deficits averaging $4.6 billion a year above the government's. This also does not account for newly announced government spending such as the sovereign wealth fund. PBO [expects](https://www.pbo-dpb.ca/en/publications/NT-2627-001-S--pbo-assessment-spring-economic-update-economic-fiscal-track--evaluation-dpb-mise-jour-economique-printemps-profil-evolution-economique-financiere?ref=borealian.ca) the sovereign wealth fund to add $25 billion to net borrowing over the medium term.

## The bond market is changing the price

Bond traders talk about term premium, the extra yield investors demand to lock up their money for ten years. When governments everywhere borrow heavily at once, that premium rises, and the price of fiscal room goes up for everyone in the queue.

The government's own update concedes that long-term rates have risen across advanced economies, "reflecting rising term premia amid elevated borrowing needs, higher defence spending, and ongoing monetary policy adjustments." Canada's 10-year yield averaged 3.88 per cent in September, up from 3.22 per cent a year earlier, according to [OECD data](https://fred.stlouisfed.org/series/IRLTLT01CAM156N?ref=borealian.ca). Every G7 10-year yield in that series rose over the same 12 months. In December 2020, Ottawa could borrow for a decade at 0.73 per cent, and some of the debt that is being refinanced now was priced in that world.

The update's [debt management strategy](https://budget.canada.ca/update-miseajour/2026/report-rapport/anx3-en.html?ref=borealian.ca) projects aggregate federal borrowing of $571 billion in 2026-27\. A government that needs that much from the market each year is highly exposed to the market's mood and other global bond market rates.

## Three G7 warnings

The United Kingdom shows how fast a market test can arrive. In September 2022, Liz Truss's government released the infamous [Mini Budget](https://www.investmentweek.co.uk/news/4056852/mini-budget-22-chancellor-unveils-growth-plan-accelerate-infrastructure-development?ref=borealian.ca), which included £45 billion in unfunded tax cuts. The sentiment of the bond market was that the UK government would not be able to sustain that fiscal burden, [triggering a UK bond and asset sell-off](https://www.bbc.com/news/business-63065415?ref=borealian.ca). In response, the [Bank of England](https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation?ref=borealian.ca) announced temporary purchases of long-dated government bonds, known as gilts, "on whatever scale is necessary." It warned that "were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability." The U.K. 10-year yield averaged 4.11 per cent the following month, up from 3.50 per cent in September, and Liz Truss lost her premiership. Britain did not default, and it did not need an IMF bailout. It still failed the market-access test. If Canada triggered the same reaction, it may be more difficult to resolve than changing the prime minister.

France shows the slower but more disastrous route. In September 2025, [Fitch](https://www.fitchratings.com/entity/france-80442195?ref=borealian.ca) cut France's credit rating to A+. As did S&P and Moody's, giving it an Aa3 with a negative outlook. Moody's said in April that it sees "significant risks that France's political parties will not be able to agree on further consolidation measures for 2027 and beyond," as [MNI](https://www.mnimarkets.com/articles/moodys-downgrade-avoided-oatbund-spread-narrows-a-little-1776066919225?ref=borealian.ca) reported. France's 10-year yield averaged 4.48 per cent in September. Moody's ties the risk to France's politics, and to whether they can still produce a plan to bring the debt down.

The United States shows that even the issuer of the world's reserve currency is not immune. [Moody's](https://www.moodys.com/web/en/us/about-us/usrating.html?ref=borealian.ca) downgraded it to Aa1 from Aaa in May 2025\. The IMF's [Fiscal Monitor](https://www.imf.org/external/datamapper/api/v1/G%5FXWDG%5FG01%5FGDP%5FPT/CAN/USA/JPN/DEU/FRA/ITA/GBR?ref=borealian.ca) projects U.S. general government gross debt rising from 126.8 per cent of GDP this year to 145.0 per cent in 2031.

Canada's position is better than all three on most measures. The IMF projects Canadian general government gross debt falling from 115.6 per cent of GDP this year to 107.0 per cent in 2031\. Canada is not alone in that, however. The same data show gross debt lower in 2031 than in 2026 in Japan, Italy and the U.K. Gross debt is expected to be higher in the U.S., France and Germany. A projected decline puts Canada in the better half of a group that is, taken together, more indebted than it was before the pandemic.

## The record: targets missed, then moved

A [fiscal anchor](https://budget.canada.ca/2025/report-rapport/anx4-en.html?ref=borealian.ca) is a target a government sets for itself so voters and lenders can judge its plan. However, an anchor is only worth something if the government treats a miss as a failure and corrects course.

The Liberal government's record on that test is poor. Budget 2024 projected a 2023-24 deficit of $40.0 billion. The [2024 Fall Economic Statement](https://budget.canada.ca/update-miseajour/2024/report-rapport/anx1-en.html?ref=borealian.ca) reported a deficit of $61.9 billion, a miss of $21.9 billion. The same statement projected a 2026-27 deficit of 0.9 per cent of GDP, and the spring update now projects 1.9 per cent, more than double. The 2024 fall statement had federal debt falling to 38.6 per cent of GDP by 2029-30, and the spring update has it at 41.8 per cent.

Then came Budget 2025, tabled in November 2025\. Instead of meeting a falling debt ratio, the government replaced its earlier targets with two new anchors: a declining deficit-to-GDP ratio and a balanced operating budget by 2028-29\. The operating budget is the day-to-day spending that excludes what the government counts as capital investment. The update splits the 2025-26 deficit into $41 billion of capital investment and $26 billion of operating deficit, so most of the borrowing now sits outside the operating-budget anchor that is supposed to discipline it.

Separating capital from operating spending can be sound practice, since a bridge lasts longer than a salary. The trouble is that Ottawa defines what counts as capital, and it adopted the new rule in the same budget in which the old ones became inconvenient. The PBO noted that "the contrast with fiscal policy settings prior to Budget 2025 remains," and it warned that the update's long-term projections "do not include all the anticipated spending related to defence."

The government will point out that the spring update projected the 2025-26 deficit $11.5 billion lower than Budget 2025 had. That is welcome, and it is also a reminder of how far each new estimate moves. The PBO's estimate of $72.0 billion for the same year is above both. A plan whose central number swings by tens of billions within the same year gives lenders little to hold on to.

## The net-debt case, and what it misses

The Department of Finance [says](https://budget.canada.ca/update-miseajour/2026/report-rapport/anx3-en.html?ref=borealian.ca) that "Canada continues to have the lowest net debt-to-GDP ratio of G7 countries" and that it is "one of only two AAA-rated G7 countries." Net debt subtracts the financial assets governments hold, and on that measure the IMF puts Canada's general government at 9.3 per cent of GDP this year, the lowest in the G7\. The department adds that debt charges "remain sustainable, near historical lows, and below the historical average over the past 40 years of 3.2 per cent" of GDP. By Borealian calculations based on IMF data, Canada's interest net of interest earned on government assets is roughly zero, at minus 0.2 per cent of revenue. IMF executive directors, in the Fund's [Article IV](https://www.imf.org/en/news/articles/2026/01/21/pr-26012-canada-imf-executive-board-concludes-2025-article-iv-consultation?ref=borealian.ca) review in January, cited Canada's "strong fundamentals." This is a serious case, and on today's numbers it is largely correct.

Net debt shows that Canadian governments, taken together, own a great deal of financial assets. However, much of that wealth cannot pay the federal government's bills, because a large part of it belongs to the Canada and Quebec pension plans. Grady Munro of the [Fraser Institute](https://www.fraserinstitute.org/commentary/canadas-net-debt-gdp-ratio-red-herring?ref=borealian.ca) points out that CPP and QPP net assets "amounting to more than $942 billion at the end of 2025" are counted as financial assets in Canada's net debt. He notes that "these assets are meant for current and future pensioners, and Canadian governments cannot use these assets to pay down debt without compromising the benefits of retirees." He adds that "Canada is one of the only industrialized countries to account for pension assets in such a way that it reduces net debt on paper."

The same caveat applies to interest. In the IMF's general government accounts, interest earned on government-held assets offsets the interest governments pay. Before netting, Canadian governments paid interest equal to 8.4 per cent of revenue in 2024, by Borealian calculations based on IMF data. A bondholder is paid from tax revenue or newly issued bonds. That is why the PBO's measure of federal debt charges against federal revenue is a clearer way to account for the government's fiscal space.

## What Ottawa should do

Ottawa needs to start taking the national debt seriously. Over the past 5 years alone, this Liberal government has added over $273 billion to our national debt. A 26% increase. At the same time, GDP has grown 17.42 per cent (2.8 per cent annually). Debt is outpacing nominal GDP growth. This raises the question: what is this debt buying if GDP growth has been so anaemic? Additionally, government accounting needs to start separating out the CPP and QPP from government assets that collateralize the debt. If the government fails to do this, they need to be honest with Canadians and tell them that their pensions are on the line if the government runs into fiscal trouble.

Separately, the government needs to commit to a real fiscal anchor. Ottawa should restore a target for the federal debt-to-GDP ratio to regain its credibility. Canada's credit ratings are worth more than any single program it might be spent on.

There are some upcoming tests in the bond market that will indicate how much patience creditors and rating agencies have left for G7 governments. Moody's reviews France on Oct. 23\. While France is going through a domestic crisis of its own (caused by budgetary shortfalls), it will be an indicator for how the market will treat countries that keep promising consolidation later. Lenders tend to be patient right up until they are not, and Canada would do better to never find out where that line is for them.

## Sources

- IMF, Fiscal Monitor, October 2026, via IMF DataMapper (gross debt, net debt, overall balance, primary balance, revenue): https://www.imf.org/external/datamapper/api/v1/G\_XWDG\_G01\_GDP\_PT/CAN/USA/JPN/DEU/FRA/ITA/GBR, retrieved Oct. 15, 2026
- IMF, Public Finances in Modern History database, December 2025 (interest paid): https://www.imf.org/external/datamapper/api/v1/ie/CAN/USA/JPN/DEU/FRA/ITA/GBR
- Borealian calculations based on IMF data: net interest = primary balance minus overall balance, divided by revenue (2026); gross interest = interest paid divided by revenue (2024)
- IMF, Sovereign Risk and Debt Sustainability Framework for Market Access Countries, FAQ, updated Feb. 19, 2021: https://www.imf.org/en/about/faq/mac-dsa
- IMF, Press Release 26/012, Executive Board concludes 2025 Article IV consultation with Canada, Jan. 21, 2026: https://www.imf.org/en/news/articles/2026/01/21/pr-26012-canada-imf-executive-board-concludes-2025-article-iv-consultation
- Reinhart, C. and K. Rogoff, "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Paper 13882, 2008: https://www.nber.org/system/files/working\_papers/w13882/w13882.pdf
- OECD long-term interest rates, 10-year government bonds, monthly, via FRED: https://fred.stlouisfed.org/series/IRLTLT01CAM156N
- Department of Finance, Spring Economic Update 2026, Annex 1, Apr. 28, 2026: https://budget.canada.ca/update-miseajour/2026/report-rapport/anx1-en.html
- Department of Finance, Spring Economic Update 2026, Economic and fiscal overview: https://budget.canada.ca/update-miseajour/2026/report-rapport/overview-apercu-en.html
- Department of Finance, Spring Economic Update 2026, Annex 3, Debt management strategy: https://budget.canada.ca/update-miseajour/2026/report-rapport/anx3-en.html
- Department of Finance, 2024 Fall Economic Statement, Annex 1, Dec. 16, 2024: https://budget.canada.ca/update-miseajour/2024/report-rapport/anx1-en.html
- Department of Finance, Budget 2025, Annex 4, Nov. 4, 2025: https://budget.canada.ca/2025/report-rapport/anx4-en.html
- Parliamentary Budget Officer, "PBO Assessment of Spring Economic Update: Fiscal Anchors and Fiscal Sustainability," May 4, 2026: https://www.pbo-dpb.ca/en/publications/NT-2627-002-S--pbo-assessment-spring-economic-update-fiscal-anchors-fiscal-sustainability--evaluation-dpb-mise-jour-economique-printemps-cibles-budgetaires-viabilite-financiere
- Parliamentary Budget Officer, Economic and Fiscal Outlook, June 2026: https://www.pbo-dpb.ca/en/publications/RP-2627-002-S--economic-fiscal-outlook-june-2026--perspectives-economiques-financieres-juin-2026
- Parliamentary Budget Officer, "PBO Assessment of Spring Economic Update: Economic and Fiscal Track," 2026: https://www.pbo-dpb.ca/en/publications/NT-2627-001-S--pbo-assessment-spring-economic-update-economic-fiscal-track--evaluation-dpb-mise-jour-economique-printemps-profil-evolution-economique-financiere
- Bank of England, "Bank of England announces gilt market operation," Sept. 28, 2022: https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation
- Agence France Trésor, France's credit ratings, retrieved Oct. 15, 2026: https://www.aft.gouv.fr/en/frances-credit-ratings
- Fitch Ratings, France entity page: https://www.fitchratings.com/entity/france-80442195
- MNI, "Moody's Downgrade Avoided," Apr. 13, 2026: https://www.mnimarkets.com/articles/moodys-downgrade-avoided-oatbund-spread-narrows-a-little-1776066919225
- Moody's, "The US Sovereign Rating Action," May 16, 2025: https://www.moodys.com/web/en/us/about-us/usrating.html
- Grady Munro, Fraser Institute, "Canada's net debt-to-GDP ratio is a red herring," May 27, 2026: https://www.fraserinstitute.org/commentary/canadas-net-debt-gdp-ratio-red-herring