Canada’s national debt has quietly ballooned over the decades — a reflection of fiscal responses to crises, demographic shifts, and ambitious public programs. While once seen as relatively tame, the debt burden has taken center stage in economic discussions. With the Bank of Canada maintaining elevated interest rates and Ottawa continuing to run deficits, investors and analysts alike are watching for signs of strain. Is Canada’s national debt on a sustainable path, or are we flirting with risk?
A Look Back: How Canada’s Debt Got Here
Canada’s federal debt history is marked by distinct phases. In the late 1960s, net public-sector debt was about 12% of GDP. However, aggressive fiscal policies in the 1980s and early 1990s pushed this figure beyond 60%. By 1996, gross federal debt peaked at 83.6% of GDP. Fiscal restraint in the early 2000s, including balanced budgets and spending controls, helped lower this ratio significantly.
Then came the 2008 financial crisis, and later, the COVID-19 pandemic — both of which triggered massive government stimulus. As of March 2024, Canada’s general government debt stands at 69.4% of GDP, up from 66.9% the previous year. According to the Parliamentary Budget Officer (PBO), while the federal debt-to-GDP ratio is expected to slowly decline to 39.2% by 2029–30, debt-servicing costs are projected to rise significantly. The PBO also revised its 2024 deficit forecast to C$46.4 billion — up from the Budget 2024 projection of C$39.8 billion — due to weaker revenues and higher spending.
Why the Debt Matters More Now
Debt by itself isn’t inherently bad — especially if it funds productive investments or temporary shocks. But the concern is in the cost of maintaining that debt. Higher interest rates have made debt servicing more expensive. The PBO estimates that debt service charges will eat up over 10% of federal revenues in 2024–25 and could surpass 11.3% by 2029–30 — a major leap from the pre-pandemic average of 7%. According to its March 2024 fiscal outlook, public debt charges are projected to hit nearly C$70 billion annually by 2029.
A key risk flagged by economists is that elevated debt levels increase Canada’s vulnerability to macroeconomic shocks. More debt limits fiscal flexibility, raises borrowing costs, and potentially undermines investor confidence. The Bank of Canada has warned that global trade volatility, especially with the U.S., and high household debt levels compound the overall financial risk picture. As Governor Tiff Macklem stated in a recent report, “A long-lasting trade war poses the greatest threat to the Canadian economy. … If loan losses occur on a large enough scale, banks could cut back on lending… exacerbating the economic downturn.”
The Role of Interest Rates
The Bank of Canada (BoC) currently holds its policy rate at 2.75%, with inflation proving sticky. Core inflation hovered around 3.15% in April 2025, well above the BoC’s 2% target. While markets had priced in rate cuts for early 2025, resilient economic data — including 2.2% GDP growth in Q1 — has delayed those expectations.
Higher rates also mean rising yields on federal bonds. These increases directly push up the cost of borrowing for the government. External liabilities are also expanding: in Q4 2024, gross foreign holdings of Canadian government debt surged by roughly US$160 billion, as international investors sought stable returns in a volatile global market.
Risks of Unsustainable Debt
There are four major risks tied to a mounting national debt:
- Crowding Out: Excessive government borrowing could crowd out private credit, making it harder for businesses and households to secure affordable loans.
- Investor Distrust: A delayed 2025 budget and a projected C$628 billion in bond issuance may worry markets, especially if accompanied by weak fiscal signals. “It raises questions about transparency and contributes to greater economic and fiscal uncertainty,” said Fitch Ratings’ Joshua Grundleger in a recent interview with Reuters.
- Sovereign Downgrades: If Canada’s creditworthiness is called into question, credit rating agencies could downgrade the country’s sovereign rating, pushing borrowing costs higher.
- Shock Exposure: Global trade disruptions, such as U.S. tariffs on Canadian exports, could reduce tax revenues and widen the deficit, worsening the debt trajectory.
How Investors Are Positioning
Investor behavior is already reflecting caution. Yields on Canadian 10-year bonds have ticked up in anticipation of heavy issuance and lingering inflation. Some institutional investors are shifting their portfolios towards short-duration bonds, minimizing interest rate exposure. “We do think that this will have an impact on Government of Canada bond yields,” noted Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.
There’s also renewed appetite for stable Canadian assets among foreign buyers, with record levels of foreign-held government debt in late 2024. In the equities space, some investors are rotating into defensive sectors like Canadian banks, utilities, and commodity-linked stocks. Dividend-paying stocks also remain attractive in an environment where bond volatility is high.
Retail investors, meanwhile, are increasingly opting for fixed income ETFs with short-term maturities, while others remain on the sidelines, wary of macroeconomic headwinds.
Bottom Line: Cautious Optimism, but No Room for Complacency
Canada’s debt picture isn’t all doom and gloom. The federal debt-to-GDP ratio is projected to decline over the next five years. Stronger-than-expected GDP growth and disciplined revenue streams provide some cushion. However, the road ahead is narrow. Servicing costs will continue rising, crowding out fiscal space for new programs.
The key lies in policy credibility. Markets will watch closely how Ottawa manages spending, communicates its budget plans, and aligns with BoC monetary policy. A misstep in fiscal signaling could have real consequences in the form of higher yields and reduced investor appetite.
Takeaways for Investors
Investors may want to shorten the duration of their fixed-income holdings to reduce interest rate risk. Staying alert to budget announcements and bond issuance levels is also important, as fiscal surprises can impact yields. Diversifying with Canadian dividend stocks and global assets can help manage risk, while monitoring the coordination between the Bank of Canada and federal policymakers remains essential. With debt sustainability a growing theme in 2025, Canada’s fiscal outlook deserves close attention.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
