National Bank of Canada : Canada enjoys foremost fiscal freedom (as per IMF)

Market View

Economics and Strategy

April 11, 2023 - (Vol. VII, No. 31)

Canada enjoys foremost fiscal freedom (as per IMF)

By Warren Lovely & Ethan Currie

We were treated to the IMF's latest World Economic Outlook (WEO) today. And while a sister publication, the Fiscal Monitor, arrives with a one- day lag, the WEO nonetheless reveals how the IMF sees government financial health evolving across the globe. There's some interesting and encouraging news for Canadians, made all the more relevant by the fact that the federal government in Ottawa utilizes the IMF's international debt comparisons when setting/outlining its key 'fiscal anchors'.

So what does the IMF have to tell us? For starters, Canada's general government sector (which is a concept that covers all levels of government plus social security) has a pronounced budgetary edge vs. G7 peers. There's been more rapid fiscal repair here. Before fully ascribing fiscal traction to a couple of years of heady nominal GDP growth, consider that Canada's general government sector has a comparatively modest structural imbalance (just -0.5% of potential GDP as of 2023). Unlike other large, advanced nations, the IMF sees Canada's structural deficit being erased by 2028. As for the closely watched debt metrics, Canada's edge is better than ever and expected to only grow over time. The IMF puts Canada's general government net debt-to-GDP ratio at a relatively skinny 14% as of 2023. The G7 average? Well, it's currently 95% and set to turn one hundred in short order. For those familiar with the IMF's estimates on net debt, you'll perhaps notice a non-trivial revision to Canada's net debt load. That captures a move to market valuation for financial assets, boosting the country's already large pool of financial assets. Not for nothing, financial assets are netted from gross debt to arrive at net debt. Lest we Canadians get too cavalier, we must acknowledge that our gross debt-to-GDP ratio isn't nearly as impressive, which is something credit rating agencies tend to take note of.

Still, for investors placing any emphasis on how one nation's finances stack up against key peers, the IMF's fresh outlook shows Canada with the foremost fiscal freedom in the G7, particularly once you control for the nation's large and growing stockpile of financial assets.

Chart 1: Canada's general gov't sector sops up red ink

General government net lending/(borrowing)

4	% of GDP
2
0
-2											-0.4
-4											-5.6
-6
-8		CAN									-6.6
-10
	USA
-12
	G7
-14
2002	2004	2006	2008	2010	2012	2014	2016	2018	2020	2022	2024	2026	2028

Source: NBF, IMF

After falling deep in the red to fight the pandemic, Canada's general government sector has staged a most impressive recovery, with increasingly negligible net borrowing vs. key peers.

Chart 2: Canada more structurally sound than G7 peers

General government structural balance: 2023 & 2028

1	% of potential GDP	0.0

0
-1	-0.5									-0.5	-1.0
-2
	-2.0
-3
-4			-3.2										-3.7	-3.8
-5				-4.3	-4.6								-4.1	-4.9
-6						-5.5
-7							-6.4	-6.6									-6.7
-8	CAN	ITA	DEU	GBR	FRA	G7	JPN	USA	CAN	DEU		ITA	JPN	GBR	FRA	G7	USA
				2023						2028 (i.e., 5 yrs fwd)

Source: NBF, IMF

Explosive nominal growth in 2021-22 won't be repeated, but Canada's general government sector has a smaller structural deficit to work down, the gap vs. the U.S. particularly striking.

Chart 3: No comparison on net debt (but gross debt another story)

General government gross & net debt-to-GDP ratio: 2023

300 % of GDP

250			Gross debt
200			Net debt
150
100								161
							129
50	14	95	95	95	99
		47
0
CAN		DEU GBR	G7	USA	FRA	ITA	JPN

Source: NBF, IMF | Note: Net debt = Gross debt less financial assets

There's no shortage of gross debt in Canada's general government sector, but when it comes to the net debt burden-a noted fiscal anchor in Ottawa-we've been best in the G7 since 2005.

Chart 4: Canada's net debt edge is new, improved, growing

General government net debt-to-GDP ratio
120	% of GDP			CAN
100					CAN (prior*)					95
				USA
80					G7						95
60
40				Net debt for
20				USA, G7						14
			from 2001
0
1980	1984	1988	1992	1996	2000	2004	2008	2012	2016	2020	2024	2028

Source: NBF, IMF | Note: Prior estimates for CAN from IMF WEO Oct-22 database

Fresh IMF data show Canada with a new-and-improved net debt-to-GDP ratio, our nation's advantage over a more profligate U.S. (or the G7 as a whole) only expected to grow over time.

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Chart 5: A different approach to valuing financial assets

Canada general government select financial assets: StatCan & IMF estimates

1. C$tln

SC NBS/GFS latest

2.0IMF Apr-23

IMF Oct-22

1.5

1.0

Note: Excludes insurance/pension assets

0.5

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Source: NBF, StatCan, IMF | Note: SC are avgs of qtrly data; IMF are inferred annuals

As for the restated net debt ratio, it reflects a different asset valuation method. By adding ~$500bln to financial assets, the net debt ratio dropped >15%-pts as of 2022 vs. prior estimates.

Chart 6: Closer examination of general gov't financial assets

Canada general government select financial assets by sector/type: 2022:Q4

1000	C$bln		Oth AR
900
		Equity/IFs
800
		Loans
700
		Debt sec
600
		Ccy/dep
500
400
300
200
100

0

Fed	Provi	Local/Abg	CPP/QPP
[26%]	[37%]	[7%]	[31%]

Source: NBF, StatCan | Note: Market value; figures in [:] are share of GG total

Rapid asset growth in the social security system (CPP/QPP) is a big part of the net debt edge, but an even larger stockpile of financial assets at the provincial level aids net debt metrics here.

Chart 7: A broader snapshot of NET debt burdens in advanced world

General government net debt-to-GDP ratio: 2023

200 Net debt (% of GDP)

150

100

50

0

-50

-100

DNK

SWE

EST

CHE

NZL

KOR

CZE

FIN

LTU

HRV

GBR

G7

FRA

ITA

JPN

NOR

LUX

CAN

TWN

IRL

LVA

AUS

NLD

DEU

SVK

MLT

SVN

ISL

ISR

AUT

Adv

BEL

USA

ESP

PRT

Source: NBF, IMF | Note: Results for 33 advanced nations from IMF WEO (Apr-23); weighted average for select country groups denoted by patterned fill

Chart 8: A broader snapshot of GROSS debt burdens in advanced world

General government gross debt-to-GDP ratio: 2023

300

250

200

150

100

50

0

Gross debt (% of GDP)

HKG

PRI

EST

TWN

LUX

DNK

SWE

AND

CHE

NOR

IRL

LTU

LVA

CZE

NLD

NZL

KOR

MLT

SVK

ISR

AUS

ISL

HRV

DEU

Emg

SVN

FIN

AUT

CYP

SMR

CAN

BEL

GBR

ESP

FRA

PRT

Adv

USA

G7

SGP

ITA

GRC

JPN

Source: NBF, IMF | Note: Results for 40 advanced nations from IMF WEO (Apr-23); weighted average for select country groups denoted by patterned fill

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IMF's country specific notes on Canada's general government finance statistics:

Source: Ministry of Finance or Treasury. Some historical data is also from National Statistics Office

Latest actual data: 2022

Notes: Fiscal data are on a calendar year basis. Canada's net debt corresponds to net financial liabilities as reported by Statistics Canada and includes equity and investment fund shares, which Canada has built up substantially. Statistics Canada has made a recent methodological change to value assets at market value instead of book value, which has decreased net debt.

Fiscal assumptions: Projections use the baseline forecasts from the Government of Canada's Fall Economic Statement 2022 and the latest provincial budgets. The IMF staff makes some adjustments to these forecasts, including those for differences in macroeconomic projections. The IMF staff's forecast also incorporates the most recent data releases from Statistics Canada's National Economic Accounts, including quarterly federal, provincial, and territorial budgetary outturns.

Reporting in calendar year: Yes

Start/end months of reporting year: January/December

GFS Manual used: Government Finance Statistics Manual (GFSM) 2001

Preliminary data: Based on quarterly data

Basis of recording: Accrual

General government includes: Central Government; State Government; Local Government; Social Security Funds; Other

Valuation of public debt: Face value

Instruments included in gross and net debt: Securities Other than Shares; Loans; Other Accounts Receivable/Payable; Other. Gross debt includes debt securities, loans, life insurance and pension, and other accounts payable but excludes unfunded pension liabilities. Net debt is estimated as gross debt minus financial assets which include currency and deposits, debt securities, loans, equity and investment fund shares, and accounts receivable.

Primary domestic currency: Canadian dollar

Data last updated: 03/2023

NBF Note: For additional information refer to the IMF (http://www.imf.org)

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