When it comes to Canada's government debt, the number you see depends heavily on the measure you use. In a note released Thursday, BMO Capital Markets highlighted a striking contrast: gross debt looks as heavy as it did in the mid-1990s, while net debt appears unusually low. The difference comes down to how pension assets are treated.
Using Statistics Canada data, BMO said Canada's "general government" gross debt stood at 131% of the economy in the second quarter. The International Monetary Fund's comparable gross measure is closer to 110%. But flip to net debt—what's left after subtracting financial assets—and the picture changes dramatically: StatsCan puts it at 17% of GDP, while the IMF estimates about 10%.
The gap between gross and net debt is largely explained by public-sector pension plan assets, which count as government financial assets. These assets offset a big chunk of the gross debt, making Canada look far less leveraged on a net basis.
Why the measure matters
For everyday investors, the distinction between gross and net debt isn't just an accounting quirk. It affects how credit rating agencies, bond investors, and policymakers assess Canada's fiscal health. A high gross debt figure can spook markets, leading to higher borrowing costs for the government—and by extension, potentially higher yields on government bonds, which ripple through the broader economy.
On the other hand, a low net debt figure suggests the government has substantial assets to back its liabilities, which can reassure investors and keep borrowing costs in check. This is especially relevant as long-term interest rates rise, making debt servicing more expensive for all borrowers.
BMO's note comes amid a period of elevated global interest rates, which have put government finances under scrutiny in many developed economies. For example, France's debt has looked riskier as investors demand higher returns, a reminder that market perceptions of fiscal sustainability can shift quickly.
What it means for investors
For investors, the key takeaway is that debt metrics are not one-size-fits-all. When evaluating a country's fiscal position, it's important to look at both gross and net measures. A country with high gross debt but substantial financial assets may be in a stronger position than it appears at first glance.
In Canada's case, the relatively low net debt suggests the government has more room to maneuver than the gross figure implies. That could support the Canadian dollar and government bonds, especially if investors focus on the net picture. However, if markets focus on gross debt, Canada could face upward pressure on yields, similar to what other countries have experienced.
BMO's analysis also highlights the importance of pension assets. These are often overlooked in simple debt comparisons, but they can significantly alter a country's fiscal outlook. For investors, understanding these nuances can help in assessing the risk of holding Canadian government bonds or Canadian-dollar assets.
As long-term rates continue to rise, the debate over which debt measure matters most is likely to intensify. For now, BMO's note serves as a useful reminder that Canada's debt load is not as straightforward as it might seem.
