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Canada's Financial Performance in an International Context

Summary

This annex reviews Canada's financial position on a comparable basis with those of the other Group of Seven (G7) countries (United States, United Kingdom, France, Germany, Japan and Italy) as well as several other countries in the Organisation for Economic Co-operation and Development (OECD). For Canada, this includes the federal, provincial-territorial and local government sectors, as well as the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP).

On a total government, National Accounts basis:

• Canada is currently the only G7 country in surplus.
• The OECD expects that Canada will be the only G7 country to record a surplus in both 2006 and 2007.
• Canada's debt burden has declined from the second highest to the lowest among G7 countries.
• Canada's net debt declined to 30.2 per cent of gross domestic product (GDP) in 2005, compared to an average of 52.7 per cent for the G7.^[1] The OECD expects Canada's net debt to continue to decline.
• While Canada's net debt is low relative to that of other G7 nations, some OECD countries have moved to net asset positions in recent years.

This annex also compares the fiscal situation of the federal governments in Canada and the United States:

• In 2005-06, the Canadian federal government posted a surplus of C$13.2 billion, or 1.0 per cent of GDP, while the U.S. federal government incurred an "on-budget" deficit of US$434 billion, or 3.3 per cent of GDP.
• For 2006-07, the Canadian federal government is forecasting a surplus of C$4.2 billion, or 0.3 per cent of GDP. On the other hand, the U.S. Administration does not project a return to balanced budgets for at least the next five years.
• The federal market debt-to-GDP ratio in Canada has been below the U.S. figure since 2003-04, with the gap expected to widen further in coming years.

In 2005, all levels of government contributed to Canada's total government surplus

• Two important factors need to be taken into account in making international comparisons: differences in accounting methods among countries, which affect the comparability of data, and differences in financial responsibilities among levels of government within countries.
• For these reasons, international comparisons rely on the standardized System of National Accounts estimates for the total government sector (i.e. the combined national and subnational levels). The OECD produces a complete series of estimates based on this system.
• According to the OECD, Canada's total government sector, which includes the federal, provincial-territorial and local governments, as well as the CPP and QPP, recorded a surplus of 1.7 per cent of GDP in 2005.
• The provincial-territorial-local government sector recorded a surplus of 0.7 per cent of GDP compared to 0.4 per cent at the federal level.
• The combined CPP/QPP sector also recorded a surplus in 2005. This sector has consistently recorded surpluses since the pension reforms of the late 1990s, which ensured partial pre-funding of the Canadian public pension system, placing it on a sustainable path in advance of the aging of the population.

Canada is again expected to be the only G7 country in surplus in 2006 and 2007

• Canada was the only G7 country to record a surplus in 2005.
• The OECD expects that Canada will continue to be the only G7 country to post a surplus both this year and next.
• Canada's surplus is expected to be 2.2 per cent of GDP in 2006 and 1.8 per cent of GDP in 2007, compared to an average deficit of about 3.5 per cent in the G7 countries.

Canada's debt burden has declined from the second highest to the lowest among G7 countries

• Given Canada's strong fiscal performance at all levels of government, Canada has had the lowest ratio of total government net financial liabilities to GDP among G7 countries since 2004.
• Canada's ratio declined to 30.2 per cent of GDP in 2005 compared to an estimated average of 52.7 per cent for all G7 countries. Canada's debt burden has dropped by more than 40 percentage points from its peak in 1995, when it was the second highest in the G7. According to the OECD, this ratio is expected to fall further in coming years.
• In contrast, the debt burdens of all other G7 countries, except the United States, have increased since 1995 and are expected to remain near their current levels for at least the next two years.

However, other major industrialized countries have also significantly reduced their debt burdens or have moved to net asset positions

• Similar to Canada, other OECD countries have significantly reduced their debt levels as a share of GDP over the past decade and some countries, including Australia, New Zealand and Sweden, have recently moved into total government net asset positions.
• Sweden, which had a total government net debt of 25.9 per cent of GDP in 1995, recorded a net asset position of 12.4 per cent of GDP in 2005. This represents an estimated improvement of more than 38 percentage points, slightly below that of Canada over the same period. Australia and New Zealand, which in 1995 had net debt-to-GDP ratios of 26.5 and 38.1 per cent respectively, recorded modest net asset positions in 2005.
• Denmark and Ireland have also significantly reduced their debt burdens and have net debt-to-GDP ratios below that of Canada.

The largest portion of Canada's total government net debt is attributable to the federal government

• Based on the OECD definition of net debt, Canada's total government net debt was 30.2 per cent of GDP in 2005, most of which reflected debt held at the federal government level. At 25.8 per cent of GDP, federal net debt was more than twice the aggregate net debt of the provincial-territorial and local governments.
• However, on a Public Accounts basis, the federal debt burden (accumulated deficit) amounted to 35.1 per cent of GDP in 2005-06, almost 10 percentage points higher than the federal net debt calculated using the OECD definition. This discrepancy mainly reflects the exclusion of government employee unfunded pension liabilities from the National Accounts measure of net debt used by the OECD (the Government of Canada fully accounts for these liabilities in its Public Accounts).
• On a total government basis, debt burdens at the three levels of government were partially offset by the significant net assets that are building up in the CPP/QPP to cope with future pressures from population aging.

The federal government in Canada has maintained a budgetary surplus since 1997-98, unlike the U.S.

• There are certain fundamental differences in the accounting practices and expenditure responsibilities of the Canadian and U.S. federal governments. For example, the U.S. federal budgetary balance includes the substantial surpluses in the Social Security system, whereas surpluses in the CPP are not included in the Canadian federal figures. For this reason, the Canadian federal budgetary balance is more comparable with the "on-budget" balance in the U.S. (excluding Social Security).
• Like the Canadian federal budgetary balance, the U.S. federal on-budget balance moved from large deficits to surpluses in the latter half of the 1990s. However, since 2000-01 the U.S. has returned to deficits whereas Canada has continued to record surpluses.
• The Canadian federal government posted a surplus of C$13.2 billion, or 1.0 per cent of GDP, in 2005-06, while the U.S. federal government incurred an on-budget deficit of US$434 billion, or 3.3 per cent of GDP. Even when Social Security surpluses are included, the U.S. "unified budget" deficit was US$248 billion, or 1.9 per cent of GDP, in 2005-06.
• While the Canadian federal government is forecasting a surplus of C$4.2 billion, or 0.3 per cent of GDP, in 2006-07, the U.S. Administration projects another large deficit for this fiscal year. In fact, the Administration does not project a return to balanced budgets for at least the next five years.

The federal market debt-to-GDP ratio is lower in Canada than in the U.S., and the gap is widening

• For reasons similar to those for the budgetary balance comparisons, Canadian federal market debt (rather than the accumulated deficit) and U.S. federal debt held by the public are the most comparable measures of the federal debt burden in the two countries.
• As a result of continued surpluses at the federal level in Canada and the deterioration in U.S. federal finances, the federal market debt-to-GDP ratio in Canada fell below the comparable U.S. figure in 2003-04.
• The Canadian ratio fell to 31.2 per cent in 2005-06, compared to an estimated 37.3 per cent in the U.S. The gap is expected to widen further in coming years.

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¹ These figures are on a National Accounts basis for the total government sector and as such are not directly comparable to the Government of Canada's target of reducing its debt burden (accumulated deficit) to 25 per cent of GDP by 2012-13, which is on a Public Accounts basis and covers only the federal government. More details on the breakdown of Canada's total government net debt by level of government are provided later in this annex. [Return]

 

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