Fiscal Policy,  Macroeconomics,  Research

Comparing Deficits in Canada and the U.S.

As Parliament prepares to receive the 2024-25 federal budget, it is interesting to compare the sharply different fiscal trends that have emerged in Canada and the U.S.

Despite predictable Conservative and business complaints about ‘overspending’, Canada’s federal deficit is very small in macroeconomic terms – and one of the smallest among major industrial countries. In 2022, according to the most recent OECD cross-country data, the general government balance in Canada ranked 9th best among the OECD’s 37 member countries as a share of GDP.(1)

Canada’s strong fiscal position is especially clear in comparison to the U.S. Canada’s federal deficits have been much smaller than in the U.S.

Deficits can be measured in two fundamental ways: on a national accounts basis (using data from the quarterly economic accounts), and on a public accounts basis (using data from the government’s official financial reports). The main difference is that the latter includes various non-cash factors: such as changes in long-run actuarial liabilities. Official budgets can also manipulate the timing of different revenue and expense items – for example, by pre-booking future expenses to capture all of the future impact of a new policy announcement in the current year’s budget. National accounts measures, in contrast, measure direct current flows of funds into and out of government: what is actually spent and received in a particular quarter or year. National accounts measures are more directly comparable across countries, since they are less affected by specific accounting strategies.

This table compares the Canadian and U.S. federal deficits using both national accounts actuals (for calendar years) and public accounts actuals (for fiscal years(2)). 

Table of Federal Deficits as percent of GDP

On a national accounts basis, the federal deficit in the U.S. in calendar 2023 (7.1% of U.S. GDP) was almost 11 times larger than the equivalent measure for Canada (0.66% of GDP).

On a public accounts basis the actual deficit recorded in the U.S. in the 12 months to September 30 2023 (6.27% of GDP) was almost 8 times larger than the actual federal deficit recorded in the 9 months ending December 31 2023 (0.81%). Since the Canadian 2023 public accounts actual does not include the year-end (at which time the government typically makes many adjustments to its treatment of various revenues, expenses, and non-cash items), the final deficit reported for fiscal 2023 will differ from this number. But even using prior year’s data, the U.S. public accounts federal deficit for fiscal 2022 was over 4 times larger than the Canadian deficit.

Bar graph of Federal Government Deficits on National Accounts
Bar graph of Federal Government Deficits on Public Accounts

The preceding figures illustrate the comparative size of the two countries’ federal deficits, and their evolution over the last three years, on both national accounts and public accounts bases. Both countries reduced their federal deficits from 2021 (still affected by COVID) to 2022 – though Canada’s deficit started off smaller, and fell further in 2022. By either measure, the U.S. deficit got larger in 2023, while Canada’s remained small.

The comparison between the two countries’ deficits is all the more instructive, given the difference in economic trajectories between the two countries. U.S. economic growth has remained quite strong, and their unemployment rate has remained significantly lower. Both countries have been grappling with high interest rates imposed by their respective central banks. In the U.S. case, however, the impact of those rates on household finances and consumer spending has been muted by the fact that most mortgage-holders have long-term fixed-rate mortgages, and hence have not experienced the same upsurge in interest costs as many Canadian households. Interestingly, inflation has followed a similar deceleration in both countries since peaking (at similar highs) in mid-2022.

The claim that Canada has large deficits resulting from a big-spending federal government is simply false. And the parallel claim that this deficit has caused both high inflation and high interest rates (imposed to fight that inflation) is also false. Canada’s inflation and interest rates have not been consistently any better than in the U.S., where deficits are many times larger.

Table of Canada-U.S. Macroeconomic Comparisons

Superior U.S. economic performance suggests that significant deficits might actually be helpful in the current moment, not harmful. They support job-creation, investment, economic growth, and real incomes – helping to counter the contractionary impact of high interest rates. Orthodox economists will argue that fiscal policy should not run against monetary policy, but that view depends on the assumption that post-COVID inflation was the result of excess demand pressures (which government spending would only worsen). If we accept that post-COVID inflation was caused by other factors (including initial supply disruptions and shortages, pent-up consumer demand when lockdowns ended, the 2022 world oil price shock, and record surges in corporate profits), then the demand-supporting effects of government deficits can be seen as welcome, not contradictory.

From a macroeconomic perspective, therefore, Canada’s federal deficit should probably be bigger, not smaller. But that won’t stop the predictable attacks from Conservatives about the evils of bloated government spending. Those attacks should be discounted.

  1.  Source: “Net saving of general government,” OECD Data Explorer.
  2.  Fiscal years run from April 1 through March 30 in Canada, and October 1 through September 30 in the U.S., so they cover different time periods. The 2023 fiscal year in the U.S. refers to the fiscal year that ended September 30 2023 (covering most of 2023), while it refers to the fiscal year ending March 31 2024 in Canada (also covering most of 2023). The table reports only 9 months data for Canada for fiscal 2023.

Jim Stanford is Economist and Director of the Centre for Future Work. He divides his time between Sydney, Australia and Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.