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In Depth

The 39th Parliament

Net debt, national debt. What's the difference?

Last Updated November 28, 2006

Finance Minister Jim Flaherty (Tom Hanson/Canadian Press)

When Finance Minister Jim Flaherty said that net debt would be eliminated within a generation in his November 2006 fiscal update, he left a lot of people scratching their heads. Journalists and pundits quickly looked at the massive $480 billion national debt and wondered how it could be whittled down to zero in 15 years, representing payments of more than $30 billion a year.

Was this voodoo math or fiscal magic?

What is net debt?

Net debt is a measure used by the Organization for Economic Co-operation and Development (OECD), though not a very well-known one. Net debt takes a measure of Canada's total financial liabilities and subtracts assets of the government.

The federal government promise, therefore, includes its own debt ($481 billion) and the debt of the provinces, territories and local governments, but also includes assets, such as the massive Canada Pension Plan, which has more than $100 billion in assets.

It's the inclusion of Canada's enormous pension funds such as the CPP that has critics questioning why the government is trumpeting the elimination of net debt as the measure of a healthy economy. The CPP's assets are forecast to grow over the next 15 years as it builds up to deal with the aging population. After 2021, the year Flaherty has targeted to eliminate net, the pension plan will see benefit payments exceed its contributions for the first time, as a large number of Canadians cash in their pensions.

Net debt or net financial liabilities (OCED, November 2006)
Year OECD net debt to GDP ratio
2000 46.6%
2001 42.8%
2002 41%
2003 35.3%
2004 31.1%
2005 26.3%
2006 20%
2007 14.9%

Then there are critics, like Liberal MP John McCallum, a former bank economist, who call net debt "an arcane statistic."

In the fiscal update, the government said its OECD-defined net debt had fallen to 30.2 per cent as a percentage of gross domestic product in 2005, compared with a 52.7 per cent for other OECD countries. Days after the fiscal update was released, the OECD released even rosier numbers, saying Canada's net debt was actually 26.3 per cent in 2005 and is forecast to drop to 14.9 per cent in 2007.

The finance minister noted that the government would not be doing anything new to reduce the debt other than follow its plan to pay $3 billion a year. But it also handed down two qualifications: "if provincial-territorial governments maintain balanced budgets and the Canada Pension Plan/Quebec Pension Plan continue to build assets as currently projected." The 2021 target to eliminate net debt has a lot to do with factors Ottawa can't control.

"This is almost a way of bragging a bit without really changing what they planned to do," said Doug Porter, a senior economist with BMO Financial, to Canadian Press.

How else can you look at debt?

There are many measures of debt. One that's in use, and published annually by Statistics Canada, is called the consolidated net financial debt.

This measure takes in financial accounts of all levels of government "to yield aggregate unduplicated financial statistics."

According to this measure of debt, in 2004, consolidated debt was at $798.4. More telling is perhaps the per cent of debt-to-GDP ratio, which in 2004 was at 63.7 per cent. In recent years, the consolidated debt has been dropping.

Consolidated net financial debt (Statistics Canada, April 2006)
Year Consolidated debt GDP
2000 $832.7 billion 79.9%
2000 $832.7 billion 79.9%
2001 $800.3 billion 71.8%
2002 $796.7 billion 71.2%
2003 $794.5 billion 65.5%
2004 $798.3 billion 63.7%

What about national debt?

Most people are familiar with the national debt, which in 2006 stood at $481 billion. This measure is well known to Canadians, as the debt level is published often, and the government has been heralding how it has dramatically lowered the debt-to-GDP ratio since it started turning out surpluses in the mid-1990s.

This number is easier to understand, especially when it can be seen how surpluses (or, on the other hand, deficits) affect the national debt. So when the government posted a surplus of $13.2 billion in 2005-06, it was able to pay down the national debt by the same amount.

One pledge that Flaherty did make during his fiscal update was to reduce its debt-to-GDP ratio to 25 per cent by 2012-13. If achieved, it would be one year faster than the Liberals under Paul Martin had forecast. But it can also be pointed out that the government is merely on the same road that Martin put the country on while he was finance minister.

The national debt
Year National debt Debt to GDP ratio Surplus/Deficit
1996-97 $562.88 billion 67.3% -$8.7 billion
1997-98 $559.92 billion 63.4% $2.9 billion
1998-99 $554.14 billion 60.6% $5.7 billion
1999-00 $539.89 billion 55% $14.2 billion
2000-01 $519.99 billion 48.3% $19.9 billion
2001-02 $511.95 billion 46.2% $8 billion
2002-03 $505.33 billion 43.8% $6.6 billion
2003-04 $496.18 billion 40.9% $9.1 billion
2004-05 $494.72 billion 38.3% $1.5 billion
2005-06 $481.50 billion 35.1% $13.2 billion

So with all these different measures, what's the bottom line? For one thing, all three measures — while revealing different aspects of Canada's balance sheet — do show a trend of falling debt and debt ratios.

The Dominion Bond Rating Service credit rating agency, which said some of the projections on net debt were overly optimistic, still noted that Canada's economic picture looked good.

"Adherence to these initiatives [in the fiscal update] will support further improvement in the already solid credit profile of the government," the agency said, but added one qualification: "Benefits will take years to materialize."

Debt ratios stacked up
Year Net debt Consolidated debt National debt
2000 46.6% 79.9% 48.3%
2004 31.1% 63.7% 38.3%

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