Charges and interest rates | Federal debt burdens will double in five years

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

Posted at 6:00 am yesterday

Joel Denis Bellavance

Joel Denis Bellavance
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Debt burdens 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 Finance Department projections included in the latest Federal Budget. In 2020-2021, they amounted to $ 20.4 billion.

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

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

“Debt expenses are manageable right now because they are at an all-time low, especially going back 30 years. In the 1990s, debt burdens accounted for a much larger share of tax revenues. It was almost 40% at the time. We are around 7% and should rise to 10% or 11% with the expected interest rate hike. So it’s quite manageable for now and for years to come, ”Giroux said.

Attention

That said, debt burdens could eventually demand a larger chunk of federal government revenue if the finance minister proceeds with some spending that has not yet been incorporated into federal projections, Giroux warned.

The Trudeau government is under severe pressure from its NATO allies to increase military spending to account for 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 has pledged to lay the groundwork for a national pharmaceutical program in the agreement he concluded with the NDP that ensures the survival of his liberal minority government until 2025. According to the calculations of the parliamentary budget official, a such a national program could cost about $ 19 billion annually, depending on terms and conditions.

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

There are significant expenses that many expected to see in the budget that were not there. But if they are found in subsequent budgets, this will increase the debt. Unless, of course, taxes and fees are raised accordingly. […] All of these potential expenses could have a huge impact on debt servicing.

Yves Giroux, Parliamentary Budget Officer

“The situation is currently manageable because it is part of an overall plan that still aims to reduce the debt / GDP ratio. Of course, debt service, if it is accompanied by significant permanent expenses that increase the deficit, we are entering an ever-increasing debt trajectory. Debt service is still an important component of public spending, ”she also noted.

Over five years, debt burdens of $ 42.9 billion will be a major federal government spending item. By comparison, Ottawa plans to pay $ 29.4 billion in 2026-27 in transfers to families through Canada Child Benefit. It also plans to pay approximately $ 26.3 billion in job insurance benefits to the unemployed during the same fiscal year.

In the balance sheet, the Department of Finance states that “public debt burdens as a percentage of GDP remain below the average of the last two decades for the duration of the forecast period, despite the significant extraordinary indebtedness due to COVID-19”.

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  • a record deficit
    In 2020-2021, the federal government recorded an unprecedented deficit of $ 312.4 billion. It is expected to come in at $ 52.8 billion this fiscal year.

    SOURCE: Ministry of Finance

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