Canada Should Recommit to Declining Debt-to-GDP Ratio: IMF Report

The International Monetary Fund (IMF) said Canada should recommit to having a declining debt-to-GDP ratio as a fiscal anchor, which the latest budget removed and replaced with a declining deficit-to-GDP ratio.

The IMF said in its Dec. 5 report that Ottawa’s fiscal anchors, which are designed to steer decisions related to spending, taxation, and borrowing, should include a debt-to-GDP anchor as a “central” one.

“Elevating the debt ratio from an indicator to a formal anchor—and positioning the deficit and operating-balance paths as complementary instruments—would create a coherent hierarchy, reinforce accountability, and help ensure investment plans remain sustainable and credible,” the report said.

The report was released following an IMF mission to Ottawa from Nov. 12 to 20, which was undertaken to review the state of Canada’s economy. The report said the country’s economy has “held up better than expected” despite a trade war with the United States, with targeted support for impacted economic sectors and budget measures to encourage investment helping to “cushion the blow.”

Budget 2025, released on Nov. 4, had the two fiscal anchors of balancing operating spending with revenues by 2029 as well as maintaining a declining deficit-to-gross GDP ratio. While the 2023 and 2024 budgets included having a declining debt-to-GDP ratio as a fiscal anchor, Budget 2025 did not.

The budget also forecast a 2025 deficit of $78.3 billion and predicted that this would fall to $65 billion in the next fiscal year before gradually declining to $57 billion in 2029–30.

The Parliamentary Budget Office (PBO) released a report on Nov. 14 analyzing the budget, finding that after conducting “stress testing,” there was just a 7.5 percent chance that the federal government’s deficit-to-GDP ratio would continue declining every year from 2027 to 2030.

The report said Canada’s long-term debt-to-GDP ratio is projected to remain “relatively stable over the next 30 years.” However, interim PBO Jason Jacques told the government operations committee on Nov. 20 that “when” Canada is hit by additional economic shocks, the federal government would not have as much fiscal room to respond.

“Consistent with the IMF research, the more debt you have and the more debt you’re carrying, the greater the risk to the economy and to your financial management the next time there is a shock,” Jacques said.

Finance Minister François-Philippe Champagne said when introducing the budget in the House of Commons on Nov. 4 that Canada has the lowest net debt-to-GDP ratio in the G7. “We have a strong fiscal position, a strong base to work for, a strong base to invest … and we must use this fiscal power to make generational investments,” he said.

Prime Minister Mark Carney said the day after the budget’s release that his government was making “generational investments while maintaining Canada’s strong fiscal advantage by taking responsible, pragmatic choices.”

Capital Spending

The IMF report also called for the Canadian government to create an independent mechanism to define capital under the government’s new spending framework. The report said this would “improve transparency, ensure comparability over time, and maintain a clear link between borrowing and the debt path.”

The PBO’s report said the federal government had an “overly expansive” definition of capital investments, resulting in capital spending of $311.6 billion over the period 2024–25 to 2029–30, as laid out in Budget 2025. That is $94 billion more than what the PBO calculated it would be over those six years using the PBO’s definition.

The PBO’s definition, consistent with Canada’s current budgeting framework and international practice such as that adopted by the UK, does not blend policy measures—such as corporate income tax expenditures, investment tax credits, and operating subsidies—with capital formation, the way Budget 2025 did.

Moreover, the PBO said the government would be unable to fulfill its promise of balancing day-to-day operating spending by 2028–29, as stated in Budget 2025, if it used the PBO’s stricter definition.

Carney’s 2025 federal election campaign platform defined capital spending as “anything that builds an asset, held directly on the government’s own balance sheet, [or] a company’s,” which includes investments in machinery, equipment, land, and buildings, and incentives to support the formation of private sector capital.

The Liberals said the move was intended to allow for greater transparency and better prioritize funding, while the Conservatives said the initiative was an attempt to hide expenditures.