Canadian housing prices are higher than levels consistent with current fundamentals in some provinces. The empirical estimates suggest that a 10 percent decline in housing prices would lead to a 1¼ percent decline in private consumption. The high level of household leverage and housing prices could prove to be a source of vulnerability. The rebound in debt and housing prices after the crisis largely reflects the resilience of the financial system and the stronger economic recovery in Canada, as well as historically low interest rates.

Abstract

Canadian housing prices are higher than levels consistent with current fundamentals in some provinces. The empirical estimates suggest that a 10 percent decline in housing prices would lead to a 1¼ percent decline in private consumption. The high level of household leverage and housing prices could prove to be a source of vulnerability. The rebound in debt and housing prices after the crisis largely reflects the resilience of the financial system and the stronger economic recovery in Canada, as well as historically low interest rates.

III. Dynamics and Composition of Gross and Net Government Debt1

A. Introduction

1. Canada’s net public debt has remained low in recent years relative to its international peers. This partially reflects large holdings of financial assets, which have increased significantly in recent years (up 11 percent of GDP since 2007). This chapter describes the composition and the dynamics of gross and net debt at different levels of government, with the main focus on the post-2007 period and the effects of the international financial crisis. The first section provides an overview of main trends in the consolidated general government gross and net debt. The next section discusses the composition and recent changes in the balance sheet at the federal level. The final section focuses on sub-national governments as they account for the largest share of gross debt and financial assets.

B. General Government Gross and Net Debt in Canada

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General Government Debt in Canada and the OECD, 2000-2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 365; 10.5089/9781463929237.002.A003

Sources: OCED and Fund staff calculations.

2. Gross debt increased significantly after 2007, as in other countries, reflecting the economic recession and the response to the international crisis. After surpassing more than 100 percent of GDP in the early 1990s, gross debt fell steadily since 1997 as Canada went through a large fiscal adjustment. By 2007, gross debt was down to 66 percent of GDP, below the OECD average.2 As the international crisis intensified, gross debt surged in 2008 and 2009 reflecting both the deteriorating economic conditions and the stimulus measures. In 2008, the rise in gross debt was mainly due to non-budgetary operations, reflecting large loans to state-owned enterprises (SOEs) and the accumulation of cash reserves at the federal level (both linked to crisis-related measures to provide support to the financial sector and the economy). In 2009, on the other hand, the sharp economic contraction played a key role in driving the increase in gross (and net) debt, although the deterioration in the fiscal deficit and loans to SOEs also continued to be a factor. By 2010, gross debt reached 85 percent of GDP, remaining below other advanced economies.

Table 1.

Gross Debt Dynamics, 2007-2010

(Percent of GDP, unless otherwise indicated)

article image
Sources: Finance Canada, Statistics Canada, and Fund staff calculations.

For the purpose of this exercise, primary deficit is computed as primary expenditures (net of interest payments) minus total revenue.

Derived as [(i - π(1+g) - g ]/(1+g+π+gπ)) times previous period debt ratio with i = interest rate, π = growth rate of GDP deflator, and g = real GDP growth rate.

The real interest rate contribution is derived from the denominator in footnote 2/ as i - π (1+g) and the real growth contribution as -g.

Derived as nominal interest expenditure divided by previous period debt stock.

3. Net debt fell rapidly up to 2008 and has remained well below OECD average since 2003, reflecting Canada’s relatively stronger fiscal stance. Financial assets have also increased faster in Canada than in most other countries in the OECD since 2007, although an international comparison is hindered by the different coverage of financial assets.3 The consolidated financial assets of the general government in Canada, at 55 percent of GDP, are larger than the OECD average of 40 percent of GDP. There is wide cross-country dispersion in the size of government financial assets. Economies with large commodity-based exports also tend to have large financial assets—in some cases much larger than in Canada. For example, Norway has more than 200 percent of GDP in financial assets.

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General Government Debtin Selected Economies

(Percent of GDP, 2010 except Russia which refers to 2009)

Citation: IMF Staff Country Reports 2011, 365; 10.5089/9781463929237.002.A003

Sources: IMF Government Finance Statistics, OECD, and Fund staff calculations.

4. Sub-national governments have the largest share of financial assets among the different levels of government in Canada. Provinces and local governments hold about 37 percent of GDP in financial assets, while the federal government had 16 percent of GDP and Social Security (Canada and Quebec pension plans) accounted for another 11 percent of GDP. Government claims on Crown corporations and other state-owned enterprises (SOEs) represent the largest share of government financial assets, about 40 percent—these include loans to SOEs and equity positions. Other significant assets include market instruments, such as holdings in domestic and foreign securities and equity.

uA03fig03

Gross and Net Debt, 2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 365; 10.5089/9781463929237.002.A003

Sources: Finance Canada, Statistics Canada, and Fund staff calculations.

C. Federal Government

5. Federal government debt rose with the crisis, but remains relatively low by international standards. Net debt increased by about 5 percentage points after 2008 to 25 percent of GDP in 2010 given the large fiscal deficit and the economic contraction. At the same time, the increase in gross debt has been more noticeable—from around 30 percent in 2007 to 41 percent of GDP in 2009–10—as the government financial assets have jumped by 8.5 percent of GDP after 2007, largely financed by issuance of government paper. Market debt instruments (bonds and short-term paper) account for the vast majority of gross federal debt (Figure 1). Total liabilities also include around 9 percent of GDP in unfunded pension liabilities.

Figure 1.
Figure 1.

Canada: Gross and Net Debt of the Federal Government

Citation: IMF Staff Country Reports 2011, 365; 10.5089/9781463929237.002.A003

Sources: Finance Canada and Fund staff calculations.
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Central Government Gross and Net Debt, 2000-2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 365; 10.5089/9781463929237.002.A003

Sources: Finance Canada, Statistics Canada, and Fund staff calculations.

6. The rise in financial assets mainly reflects substantial loans to Crown corporations in recent years. Government claims on Crown corporations (loans, equity position) and foreign exchange reserves held in the Exchange Fund Account have increased rapidly and now represent ¾ of total financial assets of the federal government. Large loans to the Canadian Mortgage and Housing Corporation (CMHC), the Development bank, and Farm Canada were the main cause of the growth in financial assets since 2008. In particular, the government’s claims on CMHC represent almost ⅓ of the central government financial assets. The loans to the Crown corporations were mainly directed to help support credit, especially to fund the purchase of insured mortgages under the Insured Mortgage Purchase Program, during the financial crisis and are expected to be largely unwound over the next years.4 However, the government is also now borrowing in the markets to on-lend to some Crown corporations, towards reducing the funding costs of those SOEs. At the same time, the share of more liquid assets, such as cash and holdings in securities, has remained relatively small except in 2008-09 when the government kept large cash balances to help provide liquidity to the financial system, as needed, in coordination with the Bank of Canada (special liquidity facilities put in place during the crisis).

Federal Government Gross and Net Debt

article image
Sources: Finance Canada, Statistics Canada, and Fund staff calculations.

D. Provinces and Local Governments

7. Net debt at the sub-national level (provinces and local governments) was on a declining trend from 1997 to 2007, reflecting an improved fiscal position. After declining steadily since 1997, driven by a period of low deficits/surpluses, net debt reached a historically low 11½ percent of GDP in 2007. At the same time, gross debt remained broadly stable below 50 percent of GDP between 2000 and 2007, while sub-national governments accumulated large financial assets in the same period.

uA03fig05

Sub-national Gross and Net Debt, 2000-2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 365; 10.5089/9781463929237.002.A003

Sources: Statistics Canada and Fund staff calculations.

8. As the fiscal position deteriorated in recent years, sub-national debt shifted to an upward trend. Since the financial crisis, the fiscal position of sub-national governments quickly deteriorated, moving to larger deficits (consolidated deficit of sub-nationals rose to 3½ percent of GDP in 2009–10). As a result sub-national gross debt surpassed 50 percent of GDP in 2009–10, and more than 200 percent of fiscal revenues at the provincial and local levels. Net debt has also increased rapidly, although remaining at low levels; while financial assets continued to increase at a more moderate pace and reached 37 percent of GDP in 2009-10.5 The liabilities at the sub-national level are mainly concentrated at the provincial level6 and in market instruments (bonds and short-term paper), which represented 63 percent of gross debt in 2010. The share of payables and other liabilities increased from 26 percent of GDP back in 2000 to 33 percent in 2010. Since the financial crisis, the increase in provincial and local gross debt (7¼ percent of GDP) was mainly via market instruments (Figure 2).

Figure 2.
Figure 2.

Canada: Provinces and Local Governments: Gross and Net Debt

Citation: IMF Staff Country Reports 2011, 365; 10.5089/9781463929237.002.A003

Sources: Statistics Canada and Fund staff calculations.

9. Sub-national governments have a more diverse composition of financial assets. The share of bonds and short-term paper has been relatively stable in recent years around 30 percent of total financial assets. Shares and foreign investments have averaged around 16 percent, in part reflecting investments of the Alberta’s Heritage Savings Trust Fund. Government claims on public sector entities represent 20 percent of financial assets (down from 25 percent in 2000). Receivables (including accrued taxes collected by the federal government and yet to be distributed) account for another 20 percent. Mortgages and other loans have risen in recent years in part reflecting loans provided by the government of Ontario to support to the auto industry.

1

Prepared by Paulo Medas and Guilhem Blondy.

2

The definition of general government gross debt is based on the national accounts balance sheet (which differs from the definition/coverage in the public accounts) but excludes unfunded pension liabilities.

3

For example some countries do not include equity holdings on state owned enterprises as financial assets.

4

The largest loan, to CMHC, amounting to 4 percent of GDP, financed the acquisition of securitized mortgages and is expected to be paid in full by the fiscal year 2014/15 as the loans mature, with the main tranche to be paid in 2013/14.

5

The accumulation of assets during a period of rising net debt is in part explained by the heterogeneity in the provinces’ fiscal positions. Some provinces, especially those benefiting from the high commodity prices, remain in a relatively strong financial position, while other have been hit harder by the crisis and will need a longer period to reduce their deficits and debt levels. Some provinces have also taken advantage of low funding costs to issue debt and build up some financial assets.

6

Provinces account for close to 90 percent of total financial assets and liabilities at the sub-national level.

Canada: Selected Issues Paper
Author: International Monetary Fund
  • View in gallery

    General Government Debt in Canada and the OECD, 2000-2010

    (Percent of GDP)

  • View in gallery

    General Government Debtin Selected Economies

    (Percent of GDP, 2010 except Russia which refers to 2009)

  • View in gallery

    Gross and Net Debt, 2010

    (Percent of GDP)

  • View in gallery

    Canada: Gross and Net Debt of the Federal Government

  • View in gallery

    Central Government Gross and Net Debt, 2000-2010

    (Percent of GDP)

  • View in gallery

    Sub-national Gross and Net Debt, 2000-2010

    (Percent of GDP)

  • View in gallery

    Canada: Provinces and Local Governments: Gross and Net Debt