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The Borrowing Authority Act and Measures of Federal Debt.pdf
Summary
Recent changes to the Financial Administration Act require the Government of Canada to seek parliamentary approval to borrow in debt markets. The Government has done so with the Borrowing Authority Act, which came into force on 23 November 2017. While parliamentary approval of increases in annual borrowing limits was required prior to 2007, the Borrowing Authority Act has three components which are new to the federal fiscal framework:
- It sets a maximum amount on the total stock of market debt of the Government of Canada
- It sets a maximum amount on borrowing by agent enterprise Crown corporations
- It requires the Government to report to Parliament on the status of borrowing with respect to the maximum amount within three years of the Act coming into force, regardless of whether the limit will need to be increased.
Parliamentarians were consequently presented with a new debt aggregate on which to vote, which was previously unpublished: government and agent Crown corporation market debt. As discussed in the Government’s Debt Management Strategy for 2018-19, this debt is expected to reach $1,066 billion in 2018-19.
This report was prepared to address two areas of confusion that have arisen in committees and debates following Budget 2018:
- How was this new debt aggregate calculated?
- How should it be used to scrutinize government borrowing?
The maximum borrowing amount of $1,168 billion was calculated as the sum of three components:
- Total cumulative past market debt of the Government of Canada and forecast amounts to be issued in the three fiscal years 2017-18 to 2019-20. This includes borrowing on behalf of consolidated Crown corporations, as well as third-party borrowing by those corporations. This component was $794 billion, or 68 per cent of the maximum borrowing amount.
- Total cumulative past borrowings by agent enterprise Crown corporations and forecast amounts for the three fiscal years 2017-18 to 2019-20. These corporations sell goods and services to parties outside government in a business model that is sustainable without parliamentary appropriations, but whose legislation deems them to be agents of Her Majesty (meaning that the government is legally liable to repay their debt in the event of default). This component was $319 billion, or 27 per cent of the maximum.
- A 5% contingency amount equal to $56 billion.
This measure of debt is appropriate for the Borrowing Authority Act as a measure of market borrowing for which the Government of Canada is ultimately legally liable. However, any one debt measure will not give a full picture of the government’s finances. For example, market debt does not capture important considerations, such as:
- Obligations to public service pension and benefit plans
- The contribution of liquid financial assets to the government’s financial position
- The pressure and relief of demographics on the future revenues and expenses of current policy commitments
- The size of the economy and its capacity to service public debt through taxes
Conventional measures of debt with which parliamentarians are familiar and that appear in the Government’s consolidated financial statements are more suited to this task.
For example, total liabilities captures the accrued obligations of the government for public service pension and benefit plans.
Net debt captures both pension and benefit obligations and the contribution of liquid financial assets to the government’s financial position.
Finally, PBO’s preferred measure for assessing the government’s overall fiscal sustainability—the fiscal gap—addresses all of these considerations. The fiscal gap measures the change in revenues, program spending, or combination of both, that is required to stabilize a government’s net debt-to-GDP ratio at its current level, considering policy commitments and demographic trends. PBO will continue to estimate and publish the fiscal gap in our annual Fiscal Sustainability Report as the key measure of the sustainability of government finances.
