The sustainability of government finances is an increasingly important policy issue across advanced industrial countries. Public debt surged during the COVID-19 pandemic and has continued to rise in its aftermath. In the United States, for example, the federal government is on a largely unsustainable fiscal path, as are many European countries—though not all.
Canada, by contrast, entered the pandemic in a relatively strong fiscal position, and that largely remains the case today. Still, elevated debt levels inevitably come with trade-offs, such as higher debt servicing costs. While there is no immediate cause for alarm, the long-term fiscal trajectory of the federal government is worth close attention—particularly in light of Budget 2025, which raised some concerns about the direction of federal finances beyond the short term.
Canada’s current debt-to-GDP ratio is quite manageable and is projected to remain so, rising modestly to around 43% by the 2029–30 fiscal year. However, the long-term picture is more uncertain. The federal government has moved away from its previous fiscal anchor of a declining debt-to-GDP ratio, maintained for several years. Where we go from here will depend, naturally, on policy choices made in the coming years.
Modelling the Future: The Debt Sustainability Simulator
To help illustrate what the long-term may hold, Budget 2025 includes a set of long-term debt-to-GDP projections in Appendix A1. In addition, Finances of the Nation offers its own analysis of long-term federal and provincial debt sustainability. Although full data to update all long-term projections is not yet available, the federal government’s medium-term outlook over the next three decades has been updated using the Finances of the Nation Debt Sustainability Simulator.
Based on a range of assumptions, the simulator shows that Canada’s federal debt-to-GDP ratio remains relatively flat over the next decade and trends downward over the longer term. This is consistent with the Department of Finance’s assumptions. These outcomes depend critically on the pace of GDP growth, interest rates, program spending growth, and revenue growth—all of which can be adjusted by users of the simulator.
The simulator’s default values are rough approximations—reasonable, but purely illustrative. If the government’s average borrowing cost remains in line with nominal GDP growth, then what ultimately matters for debt sustainability is the federal government’s future primary balance—that is, revenues minus program spending (excluding interest costs).
Structurally, many areas of federal spending grow more slowly than GDP, sometimes automatically so—for example, the Canada Social Transfer. As a result, and assuming no major policy changes, program spending growth is likely to lag slightly behind revenue growth, which tends to keep pace with nominal GDP due to the dominance of income and consumption taxes in federal revenues.
Under these conditions, from the late 2020s into the 2030s, the debt-to-GDP ratio would begin to decline at an accelerating pace, assuming nominal GDP grows at an annualized rate of around 3.5%. However, if federal program spending were instead held constant as a share of GDP beyond 2029, debt-to-GDP would not fall. Rather, it would begin to rise gradually and continue doing so beyond the projection horizon. This highlights how critical it is to maintain a slightly slower rate of program spending growth relative to revenue growth.
Alternative Scenarios and Fiscal Choices
The Debt Sustainability Simulator also offers an “alternative” medium-term projection, where users can set their own assumptions for revenue and spending growth starting in fiscal year 2025–26. Under the same assumptions as the baseline, this version shows debt-to-GDP rising steadily over the coming decades. This underscores that Budget 2025 has effectively lowered the debt trajectory by baking in a slower pace of spending growth than would otherwise have occurred.
Whether one agrees with the budget’s specific choices is a matter of judgment—something this article does not explore, nor is it the role of the simulator to do so. The tool is designed to show how federal debt might evolve under different economic and fiscal scenarios.
Conclusion: Room to Maneuver—But Not Unlimited
Both the baseline and alternative projections allow users to apply a fiscal adjustment—an immediate and permanent change in revenue or program spending as a share of GDP. For reference, each one percentage point change in the GST is equivalent to roughly one-third of one percent of GDP. In the baseline projection, a fiscal adjustment of -0.3%—equivalent to a one-point GST cut—would result in rising debt for a time, followed by a gradual decline. This offers a useful way to think about the federal government’s fiscal “space.”
In short, while Canada is approaching the outer limits of its fiscal firepower in technical terms, there is still room for maneuver while still avoiding rising debt/GDP over the medium- and long-term. The government therefore retains some capacity to adjust spending or revenues in response to future circumstances.