Expenses and Interest Rates | Federal debt charges will double in five years

(OTTAWA) The federal government’s accumulated debt charges will almost double over the next five years under the combined effect of the red ink that continues to flow in Ottawa and rising interest rates.

Joel-Denis Bellavance
The Press

Debt charges will thus rise from $24.9 billion in the last fiscal year (2021-2022) – the equivalent of this year’s National Defense budget – to $42.9 billion in 2026-2027. , according to the projections of the Department of Finance included in the last federal budget. In 2020-2021, they amounted to $20.4 billion.

The burden represented by debt charges remains under control for the moment, estimates the parliamentary budget officer, Yves Giroux. It will continue to represent about 10% of federal government revenue.

But this burden could grow heavier and become problematic in the long term. The reason ? Finance Minister Chrystia Freeland did not include in her latest budget three major expenditures that are expected over the next five years: the planned increase in military spending due to the war in Ukraine, the creation of a national program drug insurance, which is part of an agreement concluded between Justin Trudeau’s Liberals and the NDP, and an increase in health transfers, as loudly demanded by the provincial premiers.

“Debt charges are manageable right now because they’re at historic lows, especially going back 30 years. In the 1990s, debt charges represented a much larger portion of tax revenues. It was almost 40% at that time. We are at around 7% and it should go to 10% or 11% with the increase in interest rates that is expected. So it’s quite manageable for the moment and for the years to come,” said Mr. Giroux.

Caution

That said, debt charges could eventually take a bigger chunk of federal government revenue if the finance minister goes ahead with some spending that hasn’t yet been incorporated into federal projections, warned Mr Giroux.

The Trudeau government is under strong pressure from its NATO allies to increase military spending so that it represents 2% of the country’s GDP. To achieve this, this would translate into an annual increase of nearly $17 billion in the National Defense budget.

In addition, Justin Trudeau pledged to lay the groundwork for a national pharmacare program in the deal he struck with the NDP that ensures the survival of his minority Liberal government until 2025. According to the Parliamentary Budget Officer calculations, such a national program could cost about $19 billion a year, depending on the terms and conditions.

Finally, the Prime Minister recently promised to increase health transfers to the provinces, without, however, advancing an amount. The provinces, for their part, are urging the federal government to increase transfers by some $28 billion a year. They want Ottawa to pay at least 35% of the cost of health services in the country, compared to 22% today.

“The situation is manageable at the moment because it is part of an overall plan that still aims to reduce the debt-to-GDP ratio. Of course, debt service, if it is accompanied by significant permanent expenditures that cause the deficit to grow, we are entering an ever-increasing debt trajectory. Debt servicing is still an important component of government spending,” he also noted.

In five years, debt charges of $42.9 billion will represent one of the federal government’s major expenditure items. By comparison, Ottawa plans to pay out $29.4 billion in 2026-27 in transfers to families through the Canada Child Benefit. It also plans to pay about $26.3 billion in employment insurance benefits to the unemployed during the same fiscal year.

In the budget, the Department of Finance states that “public debt charges as a percentage of GDP remain below the average of the past two decades for the duration of the forecast period, despite the significant extraordinary borrowing due to of COVID-19”.