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However, while it is possible for a budget to be balanced on an accrual basis (wherein surpluses cover depreciation costs), the government could still be in a cash deficit if the capital expenditures are more than the costs of depreciating capital in the year. Debt finance is then required to cover the cash deficit.

There is considerable evidence that governments tend to find it easier to spend and run deficits than to build surpluses to cover the lean years to come. Politicians have short-term electoral cycles, and pushing tax burdens to later years may make it easier for them to be re-elected. This gives rise to the so-called deficit bias in public finances. However, running a deficit only defers the inevitable need to balance the books and contain the debt.

Table 1.3 provides total government surpluses and deficits (−) for various years. Next to Italy and Belgium, Canada had one of the higher deficits among OECD countries in 1995, although its deficit has declined significantly since then.

Canada’s debt burden grew substantially during the 1980s and 1990s until 1995, when federal, provincial, and territorial governments took strong action to balance budgets, by cutting spending and increasing some taxes. In the past decade (before the global financial crisis late in 2008), Canada has run surpluses, similar to those in certain other countries, such as Denmark and Finland. By 2010, Canadian surpluses had turned into large deficits for the federal and many provincial governments as the world recession hit Canada.

As shown in figure 1.2, total government net debt in Canada (financial liabilities net of government assets as a percentage of the GDP for all levels of government) peaked in 1995 at 71 percent. With the actions taken by Canadian governments, net debt fell to about 22 percent of the GDP by 2008. In figure 1.3, which focuses on gross debt, the debt burden peaked at 101 percent of the GDP in 1995-1996 and fell to 70 percent by 2008.

The world dramatically changed in 2008, when the financial crisis radically impaired the global economy. With the world recession, governments, including the Canadian government, faced falling tax receipts and higher spending associated with unemployment and stimulus expenditures. Canada’s net debt is expected to climb to about 33 percent of the GDP in 2011 (and the gross debt to over 80 percent of the GDP) according