Deficit rises as Canada faces fiscal challenge

Canada's Q4 sees a $9.5bn deficit and a 20% jump in interest expenses amid fiscal shifts

The Canadian general government's fiscal health witnessed notable changes in the fourth quarter, with a deficit that escalated to $9.5bn, marking an increase of $5.9bn from the year prior, as reported by Statistics Canada

This widening deficit was primarily due to a significant uptick in expenses, which surged by $17.4bn, outpacing the growth in revenue by $11.5bn.  

The expense growth was chiefly propelled by compensation of employees which rose by $7.7bn, or 9.1 percent, alongside interest charges that increased by $4.2bn, or 20.0 percent. On the revenue front, the enhancement was largely attributable to income taxes.   

Breaking down the deficit figures further, the federal government's deficit swelled by $4.3bn, reaching a total of $8.4bn in the fourth quarter. In contrast, the provincial and territorial governments posted a deficit of $4.5bn, a significant reversal from a modest surplus of $0.3bn seen a year earlier.  

Conversely, social security funds which encompass the Canada Pension Plan and Québec Pension Plan, enjoyed a surplus of $1.3bn.   

The general government's deficit as a percentage of nominal Gross Domestic Product (GDP) stood at 1.3 percent in the fourth quarter, the highest such ratio since the second quarter of 2021.   

Specifically, the federal government's deficit-to-GDP ratio was at 1.1 percent, while the deficit posted by provincial and territorial governments represented 0.6 percent of GDP.   

In terms of interest expenses, the Canadian general government observed a significant increase, up by 20.0 percent compared to the same period last year.  

The federal government experienced a dramatic rise in interest expenses by 39.3 percent from the previous year, with provincial and territorial governments seeing a more subdued increase of 7.2 percent.  

For the 2023 calendar year, the total interest accrued on the government's debt amounted to $93.8bn.   

This spike in interest expenses led to an increase in the ratio of these expenses to revenue for the federal government, reaching 10.0 percent in the fourth quarter, up from 7.6 percent the year before.  

This means that the federal government devoted 10.0 cents of every dollar of revenue to interest payment, whereas "provincial and territorial governments devoted 7.6 cents.   

On a brighter note, the Canadian general government's net debt saw a reduction of $33.8bn, or 5.5 percent, year over year, landing at $575.5bn at the quarter's close.  

This decline was attributed to an increase in the value of financial assets by $150.8bn, or 5.4 percent, which more than offset the rise in government liabilities of $117.0bn or 3.5 percent.   

Excluding social security funds, the general government's net debt rose by $34.7bn, or 2.8 percent, during the same period. The federal government's net debt decreased by $31.5bn, or 3.6 percent, whereas the net debt of provincial and territorial governments jumped by $71.5bn, or 22.1 percent.  

The quarter also recorded an increment in outstanding debt securities by $48.4bn, with emissions of $22.0bn from the federal government and $26.3bn from the provincial and territorial governments.   

By the end of the fourth quarter, the general government's net debt as a percentage of GDP increased to 19.9 percent from the previous quarter's 16.0 percent, following 11 consecutive quarters of decline. When excluding social security funds, the net-debt-to-GDP ratio saw a rise from the preceding quarter, reaching 44.7 percent.