Canada's rising public debt could limit the government's ability to respond to another major economic downturn, potentially adding to the financial pressures facing households already struggling with debt, an insolvency expert says.
A new report from the C.D. Howe Institute puts Canada's combined federal and provincial net debt at approximately 74 per cent of gross domestic product, up from 65 per cent in 2019, before the COVID-19 pandemic. The findings raise concerns about the country's fiscal flexibility if another economic shock requires significant government intervention.
Joshua Harris, a licensed insolvency trustee at Harris & Partners, said the implications could extend to households facing mounting borrowing costs, loan repayments and everyday living expenses.
"While government debt and household debt are very different, the underlying concern is similar. When financial pressures build up over time, there is less room to respond when something unexpected happens."
Debt levels raise questions about fiscal flexibility
The C.D. Howe Institute report warns that continued government borrowing could reduce Canada's capacity to respond to future economic crises. If public finances come under further pressure, governments could face difficult decisions involving taxation and public spending.
The report also highlights the scale of borrowing increases during previous downturns, finding that Canada's combined public debt ratio rose by an average of approximately 17 percentage points during the two most recent major economic crises.
With the debt ratio already elevated, another significant economic shock could put additional pressure on government finances, according to the report.
Harris said households carrying existing debt could be particularly vulnerable if economic conditions deteriorate, especially if they have limited financial room to absorb unexpected expenses or a loss of income.
"For Canadian households already struggling with credit card balances, loan repayments and everyday living costs, another economic downturn could make an already difficult financial situation considerably harder.
"The concern is that if governments have less flexibility to respond to a future crisis, households experiencing financial difficulties could face additional uncertainty at precisely the time they need support."
Household finances remain a concern
Harris said the potential for another downturn underscores the importance of households assessing their financial positions before debt becomes unmanageable. People who can continue making minimum payments may not recognize how quickly their circumstances could change when faced with an unexpected expense or a reduction in income.
He said rising reliance on credit to cover routine expenses can be a reason to review household finances and consider available support.
"One of the biggest risks for households is waiting until debt becomes completely unmanageable before seeking help.
"People can often keep up with minimum repayments for months or even years, but an unexpected expense, reduction in income or increase in essential costs can quickly change that.
"Anyone finding themselves increasingly reliant on credit to cover everyday expenses should consider reviewing their financial position and exploring the support available before their situation worsens.
"Canada is not currently facing the kind of fiscal crisis outlined in the report, but the findings are a reminder of why financial resilience matters, both for governments and for individual households."
Harris & Partners Inc. is a licensed insolvency trustee firm with roots in Southern Ontario dating back to 1964. The company has offices in nine of Canada's 10 provinces and has helped thousands of individuals and companies address debt.