COMMENTARY: Ottawa's investment mirage: debt service outpaces investment

At Canada’s investment summit in Toronto on Sept. 15, Prime Minister Mark Carney said, “We are on track to balance the operating budget next year, one year ahead of schedule.” That means the budget would be balanced in 2027-28, rather than in 2028-29 as outlined in Budget 2025.

Nine days later, the Parliamentary Budget Officer (PBO), in its Sept. 24 report, projected that the government would miss the 2028-29 operating budget balance target by about $500 million and achieve balance only in 2029-30, two years later than the prime minister’s estimate. This discrepancy indicates the uncertainty surrounding the target for the operating budget balance.

The differing timelines for balancing the operating budget result from varying assumptions and inconsistent definitions of capital investments. The PBO notes that Ottawa applies subjective criteria to define capital investment and classifies certain standard operating expenditures as capital investments. This practice undermines the credibility of the balancing operating budget target.

Balancing the operating budget is only one aspect of fiscal management. Achieving this by 2029-30 would not eliminate the overall federal deficit. A projected capital budget deficit of nearly $60 billion in 2029-30, along with a gross debt of $1.58 trillion, would leave significant fiscal challenges unresolved.

A deficit is a flow variable measured over a fiscal year, and debt is a stock variable accumulated over time. The annual deficit adds to the stock of debt. This in turn increases debt service charges. The PBO’s Economic and Fiscal Outlook (June 2026) projects debt service charges will rise from $53.7 billion in 2025-26 to $75.0 billion in 2029-30. The cumulative debt service charges would total $320.6 billion from 2025-26 to 2029-30.

Debt service charges are statutory expenses that are included in the operating budget and are projected to reach 10.5 per cent of federal revenues in 2025-26 and nearly 13 per cent by 2029-30. This trend raises concerns about federal budget reporting and highlights rising structural fiscal costs included in the operating budget.

Canada has shifted from the widely accepted declining debt-to-GDP ratio as its primary fiscal anchor to two new targets: balancing the operating budget by 2028-29 and maintaining a declining deficit-to-GDP ratio.

No other G7 country uses a declining deficit-to-GDP ratio as its formal, binding fiscal anchor. As a result, the International Monetary Fund (IMF) has urged Canada to recommit to a declining debt-to-GDP ratio as its principal fiscal anchor, stating the deficit-to-GDP ratio anchor is insufficient to ensure fiscal sustainability.

A declining deficit-to-GDP ratio only demonstrates that annual borrowing is decreasing relative to GDP. It does not indicate whether increasing debt is sustainable, whether rising debt service charges will constrain essential program spending, or whether capital investment borrowing will generate sufficient productive capacity.

The watered-down fiscal anchors provide limited assurance about Canada’s long-term fiscal health and leave key challenges unresolved.

A significant omission in Ottawa’s capital budgeting framework is the exclusive reporting of gross capital investment, without presenting net investment after deducting depreciation of capital assets. Net investment is what increases capital formation and contributes to productivity and economic growth.

Ottawa’s total capital investment over six years is $311.5 billion. However, this figure includes capital transfers to provinces, municipalities, and Indigenous communities, as well as amortization, tax incentives, R&D support, housing measures, and programs to stimulate private investment.

The PBO estimates that under a narrower, standard definition of capital investment spending, excluding reclassified operating spending, Ottawa’s total investment would be $217.3 billion. This is about $94 billion, or 30%, less than the government’s reported figure.

Classifying certain operating expenditures as capital investments does not necessarily make them investments in economic terms. The PBO therefore recommends that an independent expert body be established to assess which operating expenditures really constitute capital investment.

Although investment credits, tax expenditures, research and development support, and operating and production subsidies may stimulate private investment, the increasing fiscal cost of inducing them should not be overlooked.

It is also essential to assess how much of Ottawa’s debt-financed capital investment spending simply replaces depreciated capital assets. The key consideration is how much this spending contributes to net investment. Notably, C.D. Howe’s recent study (March 2026), titled Canada’s Investment Crisis, observes: “Over the past decade, investment in new capital has lagged the rate at which existing capital wears out and goes obsolete.”

The $311.5 billion in capital investment is presented without reference to rising debt service charges, which totaled $320.6 billion over five years. Simply stated,  Ottawa’s investment mirage: debt service outpaces investment.

It is reasonable for the federal government to justify borrowing to finance capital investment. But the central economic question is whether the return on investment exceeds the fiscal cost. The assessment should go beyond whether Ottawa balances its operating budget or reduces the deficit-to-GDP ratio. It should determine whether increased public expenditure, borrowing, debt accumulation, and debt-servicing costs support the necessary enhancement of the economy’s productive capacity and the well-being of current and future generations.

Palanisamy Nagarajan is a professor emeritus of economics and an island studies teaching fellow at the University of Prince Edward Island.