(Ottawa) The federal government will not be immune from the expected rise in interest rates. It forecasts that its debt charges will drop from 24.5 billion in 2021-2022 to 40.9 billion in 2026-2027.
Although this amount appears high, the government believes it is in a position to pay it. “Yes, it is sustainable,” said a senior official of the Ministry of Finance during the closed session organized to present the economic update to the media.
At 40.9 billion, debt charges would correspond in 2026-2027 to 1.3% of gross domestic product (GDP). “This proportion is much lower than the level of 2.1% in 2007-2008, before the financial crisis, and this, in spite of the exceptional expenses caused by the pandemic”, indicates the Ministry of Finance in this update of the state public finances.
Even in its most pessimistic scenario with an interest rate hike of 1%, the Ministry estimates that debt charges would constitute less than 1.7% of GDP.
“It is an upward trend as a percentage of our collective wealth, but we have already seen much higher,” noted Professor Luc Godbout, of the Research Chair in Taxation and Public Finance at the University of Sherbrooke. “No need to go back to the mid-1990s, but even more recently, we already had debt service that was higher in proportion to GDP. ”
The government is counting on economic growth to mitigate the impact of this heavy debt load. It forecasts an increase in its revenues, which would increase from 370.5 billion in 2021-2022 to 481.0 billion in 2026-2027. According to our calculations, debt charges, at 24.5 billion, would constitute 6.6% of its revenues for the current fiscal year and 8.5% in 2026-2027.
These are not overly optimistic growth forecasts, according to Mr. Godbout, who also notes a change in the government’s strategy to pay the debt charges. “Over a six-year horizon, the debt service doubles,” he notes.
Expected decrease
The federal debt, which is now over $ 1 trillion, would reach $ 1,345.7 billion in five years, or about $ 65 billion less than the government forecast in the last budget.
With the accumulated deficits, no debt repayment is expected on the horizon. We have to go back to the 2007-08 fiscal year, before the 2009 financial crisis, to find the last time the government reduced its balance through a surplus. Stephen Harper’s Conservatives were in power at the time, and finances were managed by Jim Flaherty.
“A historic level of debt with no opportunity for our young people,” denounced the current leader of the Conservative Party of Canada, Erin O’Toole. “No more inflation, no more debt and a serious risk of an interest rate hike. ”
“We had the lowest net debt to GDP ratio in the G7 at the start of the crisis and in fact we increased our relative advantage throughout the pandemic”, recalled the Minister of Finance, Chrystia Freeland, in conference Press. She said she was determined to reduce this ratio “in the medium term” and to mitigate the deficits related to COVID-19.
The debt burden in relation to GDP will be 48% in 2021-2022, a decrease of one percentage point compared to the forecasts of the last budget. According to forecasts from the Ministry of Finance, it will gradually decline to reach 44.0% of GDP within five years.