A potential sovereign debt crisis looms as governments continue to ramp up their spending and deficits. In 2024, the latest year for which data are available, global gross public debt hit 95 per cent of world GDP, 32 points higher than in 2001. The G7 countries, which make up 30 per cent of the world's economy, are even worse, with gross public debt now at 124 per cent of GDP. Defence needs, demographic pressures, and a desire to support the vulnerable will likely lead to even more debt.
Interest rates climbing
It is no surprise that 10-year treasury bond interest rates have returned to levels not seen since just before the 2008 financial crisis. The U.S. 10-year rate averaged 4.52 per cent in May, more than double its May 2019 average of 2.4 per cent. Borrowing charges are taking up a larger share of taxpayer dollars.
Canada's debt situation
Canada is by no means immune from excessive borrowing. Our general government gross debt has reached 111 per cent of GDP, up from 67 per cent in 2001. We are fourth highest in the G7 and seventh highest amongst advanced economies, though at least we are less leveraged than the United States, where general government debt is 126 per cent of GDP.
The Fraser Institute estimates that federal and provincial net debt, which is gross debt minus financial assets, totals almost $2.5 trillion, equal to three quarters of our GDP. Wisely, and unlike the federal budget, the Institute does not subtract almost a trillion dollars in CPP and QPP net assets to get to net debt. Those assets are spoken for. They have to fund our future pension liabilities, which the feds simply ignore in measuring net debt. In a crisis, net debt is meaningless anyway: the market value of financial assets plummets as interest rates rise. For this reason and because tangible government assets like roads and buildings are illiquid and therefore hard to dispose of, rating agencies focus on government gross debt in assessing stress risk.
Hidden debt-drivers
But these calculations omit hidden debt-drivers that we ignore at our peril. Weakening productivity is a key concern. Growth in GDP per hour worked has dropped steadily among OECD countries, from annual growth of 2.4 per cent in 2000-2007 to 0.8 per cent in 2021-2023. With weaker growth, taxes do not rise as quickly, producing higher deficits when government spending continues to grow. Since 2016, Canada's general government expenditure has risen by 3.4 percentage points of GDP, reaching 44.2 per cent in 2025. Over the same period, revenues grew only 2.1 percentage points, to 42.4 per cent. With per capita income almost flat, the increase in revenue was solely from tax hikes and population growth. Overall, Canada's general government deficit rose 1.3 percentage points of GDP.
Public-sector spending is humongous, equal to two-fifths of Canada's economy and hurting productivity since taxes discourage work and investment. Canada is also the 10th highest spender on social services among OECD countries, at 24.9 per cent of GDP. Social services do help vulnerable people, but government transfers reduce the incentive to work or save.
