The United States is on an unsustainable fiscal path that poses a graver threat to Canada than its own government debts, according to an opinion published June 25, 2026 by Martin Eichenbaum, an international fellow at the C.D. Howe Institute and economics professor at Northwestern University. While Canada faces real fiscal pressures from health care, an aging population, and weak productivity growth, Eichenbaum argues that a U.S. fiscal crisis would trigger severe consequences for Canada through multiple channels, and Canadians should start preparing now.

The U.S. is running large, persistent "primary deficits," meaning tax revenues don't even cover regular government expenditures, let alone interest payments, according to the report. Federal debt is already above 100 per cent of GDP and is projected to keep rising. Under a variety of plausible assumptions about interest rates and growth, the debt-to-GDP ratio will rise without bound absent serious fiscal reform. The report notes that the U.S. federal budget is dominated by protected categories including Social Security, health, defence, interest payments, and other mandatory spending, making stabilizing the debt difficult without large spending cuts or tax increases.

The report states that "there is no magic debt threshold at which crisis suddenly strikes," but warns that persistent large primary deficits eventually dominate the equation regardless of interest rates. Eichenbaum writes that "at some point, investors worry about sustainability. Borrowing costs rise. Higher interest payments add to deficits. Larger deficits push borrowing costs even higher." According to the analysis, raising U.S. taxes to Canadian levels would help, but there's little evidence the American political system could make such changes on the required scale. The report concludes that Canada's fiscal problem is manageable so long as policy follows pre-COVID patterns, giving the country time to adjust.

A U.S. fiscal crisis would hit Canada through several channels, the report explains. A sharp U.S. recession would reduce Canadian exports, while a flight from U.S. dollar assets could raise the loonie's value and hurt exporters further. A global recession would depress oil and commodity prices, and sell-offs in U.S. stocks and bonds would hit Canadian banks, pension funds, insurers, and households. Most dangerous of all, Eichenbaum warns, a loss of confidence in U.S. Treasuries could trigger a global liquidity crisis. The result would be a severe Canadian recession, a higher debt-to-GDP ratio, and stress on a financial system built on the assumption that U.S. sovereign debt is risk-free. The report emphasizes that debt dynamics depend on three forces: the interest rate governments pay on debt, the economy's growth rate, and the primary balance between taxes and non-interest spending.

The report recommends several preparation measures Canada can take now. Governments should borrow at longer maturities while interest rates remain reasonable, reducing rollover risk if global rates spike. Regulators should stop treating U.S. Treasuries as risk-free, and banks, pension funds, and insurers should be stress-tested against severe U.S. sovereign stress scenarios. Canada should re-examine institutional exposure to the U.S., including direct holdings of government debt and indirect exposure through funding markets, collateral, and derivatives. The Bank of Canada should prepare contingency plans for a global liquidity crunch in which the usual safe asset is no longer unquestionably safe. Finally, the report emphasizes that Canada needs to get serious about productivity growth, which raises GDP, improves tax capacity, and creates more fiscal room in a crisis. The bottom line: Canada can't fully insure itself against a U.S. fiscal crisis, but it can become more resilient—and the work should start immediately.