After heavy borrowing during the Covid pandemic, experts say that the federal government isn’t paying down its debt quickly enough, impairing its ability to prepare for the next economic shock.
“A lot of the debt that the federal government took on during the pandemic has been made permanent,” Warren Lovely, managing director, chief rates strategist and public sector analyst with National Bank Financial, said during a Global Risk Institute webinar Thursday. “The federal government’s got long Covid in terms of taking on a lot of debt [and] making it more permanent as a share of GDP.”
While the federal government sometimes quotes a net debt-to-GDP ratio of all levels of government, which was at 19% in the third quarter of 2025, the gross debt-to-GDP ratio is 128%. The difference is that the net figure factors in the government’s financial assets.
However, the net debt-to-GDP ratio can be misleading as the federal government only controls about a third of the assets factored into the figure, Lovely said. A large share is controlled by other levels of government or lies in the social security system. And even the assets the feds do control aren’t all liquid.
Maintaining higher than usual levels of debt will hamper Canada’s ability to borrow for the next crisis, said Chris Ragan, an associate professor and founding director of McGill University’s Max Bell School of Public Policy.
“Economic crises do happen every once in a while … [and] governments should use their borrowing power to address these crises,” he said. But “after a debt raising crisis, we need to get the debt-to-GDP ratio back down again.”
Ragan illustrated three borrowing “zones” according to the real interest rate minus the real economic growth rate. A high figure, such as in the mid-1990s is the red zone; a medium figure, as Canada is in now, is fiscal complacency; and a low figure, as in the 2000s, is fiscal prudence.
“The yellow zone is this zone of fiscal complacency,” Ragan said. “You’re only one bad shock away from being pushed into the red zone.”
We could face multiple economic shocks at the same time, such as another pandemic coupled with a trade war, he added. It’s only in the “green zone” where Canada will be able to absorb simultaneous shocks.
But paying down debt won’t be politically popular. Taxpayers want to receive services equal to or greater than tax payments, so they’ll perceive high debt repayment costs as not getting any services in return, Ragan said. While paying down federal government debt will cause short-term pain, the long-term gain is getting fiscal affairs in order for the next crisis.
“People tend to forget that the reason we’re making interest payments today is because we borrowed money, hopefully for some good reason in the past,” Ragan said. “But in the ebb and flow of the political debate that fiscal nuance tends to be lost.”