Canada reported a $61.9 billion federal budget deficit in today’s Fall Economic Statement and we’re preparing for the political circus that’s about to ensue. Even before the release of the FES, Poilievre had already seized upon Finance Minister Chrystia Freeland’s resignation this morning to pursue whatever was politically expedient. I believe his exact words were “out of control,” as he took the opportunity to call for an up-or-down vote on the economic statement and shoehorn in his single-issue “carbon tax election.”

But can we talk about the debt for a second, separate from political opportunism?

To unpack this, we need to step back from the political noise and consider the deficit in context—what caused it, how it fits within Canada’s overall fiscal picture, and whether it presents real economic risks.

Debt is not automatically either good nor bad

Debt, by itself, is neither inherently good nor bad. Like any tool, its value depends on how—and where—it is used. Economists broadly agree that the impact of public debt hinges on several factors:

1. Where the money is spent: Investments in infrastructure or education, for example, often yield long-term returns, while excessive short-term consumption can strain resources.
2. Debt relative to GDP: A country’s economic output matters because it shows whether debt is sustainable.
3. Market conditions: Mature financial systems, like Canada’s, are better equipped to issue and manage debt.

While it’s always prudent to approach debt with caution, these factors suggest that not all deficits are created equal.

One-time $20 billion payout for residential school settlements

One of the largest contributors to this year’s deficit is the $20 billion allocated for Indigenous lawsuit settlements—a necessary step to compensate survivors of Canada’s residential school system.

It’s important to highlight that this is a one-time payout. Unlike recurring expenditures, which can exacerbate long-term deficits, this settlement is not part of Canada’s structural fiscal commitments.

Moreover, addressing historical injustices has moral and social benefits that extend beyond economics. While this is a significant expenditure, ignoring these obligations would have social costs that are harder to quantify but no less real.

Debt and inflation: A nuanced relationship

A common criticism of deficits is that they fuel inflation. While there is some truth to this concern, the relationship between public debt and inflation is more complex than critics often suggest.

An international literature review of debt dynamics found that debt’s impact on inflation depends on multiple factors, such as total debt relative to GDP and maturity of financial markets. More heavily indebted countries show a positive relationship between debt and inflation, and the reverse is true for those with relatively lower national debt and more advanced financial infrastructures. In stable economies like Canada’s—with independent central banking and a developed financial system—debt’s inflationary effects are typically muted.

To put it simply, Canada’s deficit is unlikely to be a primary driver of inflation. Current inflationary pressures stem more from global supply chain disruptions, energy price volatility, and central bank policies than from federal spending.

Who holds Canada’s debt?

Another point often misunderstood is who actually holds Canada’s debt. Some critics frame it as though the government is borrowing irresponsibly from external creditors. In reality, 76% of Canada’s debt is held domestically by Canadian institutional investors, such as pension funds, banks, and insurance companies.

This matters because Canadian government bonds are low-risk assets that provide stability to these institutions. In turn, they secure Canadians’ retirement savings, insurance policies, and financial stability.

When Canada issues debt, it does so in Canadian dollars by selling bonds to these investors. This process reinforces economic stability and ensures liquidity in the market. And unlike countries that borrow in foreign currencies, Canada maintains full control over its repayment mechanisms, minimizing default risks.

The bigger picture: Deficit and GDP

Numbers like $61.9 billion are headline-grabbing, but they don’t tell the whole story. What truly matters is Canada’s debt-to-GDP ratio—a measure of how much debt the country owes compared to its economic output.

Currently, Canada’s debt-to-GDP ratio is lower than that of many peer nations, including the United States and several European countries. The net debt-to-GDP ratio hovers between 13 to 14%, significantly lower than the G7 average of 95%. The gross figure is at 104%, showing some fiscal vulnerability. But this suggests that while the deficit is significant, it remains manageable within the broader context of Canada’s economy.

That said, a rising debt-to-GDP ratio could limit Canada’s flexibility in responding to future economic challenges. Striking a balance between addressing immediate needs, like the Indigenous settlement, and maintaining fiscal stability is key.

Criticisms of overspending: Fair or misleading?

Not all criticism of government spending is unwarranted. Persistent deficits, particularly if driven by recurring expenditures, can lead to structural challenges. Governments must always weigh the risks of short-term spending against long-term fiscal sustainability.

However, in this case, much of the criticism ignores the nuance of the current deficit:

1. The $20 billion Indigenous settlement is a one-off expenditure, not part of ongoing structural spending.
2. Much of the remaining deficit reflects necessary measures to support economic recovery and meet pressing needs.

Does this mean there are no risks? Of course not.

The Bank of Canada’s recent rate cut to 3.25% aims to stimulate economic growth amid signs of a slowing economy. Slower growth can shrink the government’s tax base in real terms, as per capita GDP stagnates or declines.

Running a deficit in this context can act as a fiscal counterbalance, injecting demand into the economy when monetary policy alone may not suffice.

However, this strategy requires careful management to ensure that increased spending effectively promotes long-term growth without compromising future fiscal stability.

Dismissing the deficit as “reckless overspending” oversimplifies the issue and overlooks this broader economic context.

Beyond politics

Canada’s $61.9 billion budget deficit is not without risks, but it’s far from the fiscal crisis many will attempt to make it out to be. Debt, when used prudently, can fund essential investments and address historical obligations, as we’ve seen with the Indigenous settlement.

The real question isn’t whether debt is good or bad—it’s whether it’s used wisely. That’s where we need to focus our energies on instead of adopting a blanket “debt bad” position. The current deficit includes a mix of one-time obligations and targeted spending to support economic recovery. While the size of the deficit demands attention, it’s crucial to evaluate it within Canada’s broader economic context, not through the lens of partisan politics.

Of course, I’m already foreseeing Poilievre leaning a little more heavily into one of his established verb-the-noun slogans: Fix the Budget.