The cost to service the federal government’s sizeable debtload will spike in the years ahead — and those public debt charges will eat up much more of Ottawa’s revenue than they have in recent years, according to Finance Minister Chrystia Freeland’s fall economic statement, tabled today.
Freeland’s document suggests Canada will avoid a recession but predicts economic growth will slow to a crawl. Unemployment is set to rise nearly a full percentage point next year and tens of thousands more people could be out of work.
Freeland wants to spend about $20.8 billion more over the next six years than the federal government initially projected. Freeland is pitching the increase as smaller than in years’ past and a sign of fiscal prudence. Most of the new spending is earmarked for new housing initiatives, such as low-cost loans to builders.
The federal Liberal government has run a deficit every year since it was elected. It posted even bigger deficits during the COVID-19 pandemic as it scrambled to shore up an economy on the ropes during an unprecedented health crisis.
Now, with interest rates at a 20-year high, the cost to borrow all that money has spiked from $20.3 billion in 2020-21 to $46.5 billion in this fiscal year. The debt service charges will march even higher still in the years ahead. Carrying the debt is expected to cost the federal treasury $60.7 billion a year in 2028-29, according to the economic statement.
That means debt service charges are now among the most costly line items in the federal budget.
To put that in perspective, Ottawa will spend $28.9 billion on the Canadian Armed Forces this fiscal year — about $18 billion less than what the government will send in payments to the bankers and bondholders who carry Canada’s debt.
The government’s debt costs this year are $20 billion higher than the sum it has earmarked for one of its signature policies — the Canada Child Benefit, which sends cheques to families with kids.
The debt charges are also more than double what the employment insurance (EI) program will cost Ottawa this year.
The $2.6 billion increase to the cost of servicing the debt this year is roughly equal to all of the new measures Freeland announced today for 2023-24 ($2.7 billion). Some of the new measures are meant to address the housing crisis and persistent affordability issues.
Kevin Page, the former parliamentary budget officer, said it was “inevitable” that debt servicing costs would rise once the government decided to backstop the entire economy during the pandemic.
“There was an enormous increase in debt. There were really massive increases in debt. Now it’s going to come back to bite us,” he told CBC News.
The federal debt has doubled from $619.3 billion in 2015-16, the first year of Trudeau’s government, to $1.2 trillion last year. It’s expected to climb to $1.4 trillion by 2028-29.
The government has less fiscal leeway now to address issues like the housing supply crunch because it’s spending so much more on servicing that debt, Page said.
“The government is losing fiscal space because of rising debt interest charges relative to GDP. Debt is growing and it’s not insignificant. When people say, ‘I want to do this’ and ‘I want to do that,’ the government just doesn’t have the fiscal room. It’s getting eaten up effectively by the credit card bills,” he said.
While the amount of new spending in this economic statement is lower than it has been in past budgets or fiscal updates presented by the Trudeau government, Freeland’s plan still includes $20.8 billion more for new measures over the next six years than what she laid out in the spring budget.
$40 billion deficit
The deficit for this fiscal year is projected to be $40 billion — almost exactly what Freeland said it would be in the spring budget.
But there’s trouble on the horizon.
While the government says it expects Canada will avoid a recession, the Department of Finance is projecting the economy will see almost no growth (0.4 per cent) next year.
The unemployment rate is expected to tick up nearly a full percentage point to 6.5 per cent in the second quarter of next year. Debt charges will rise as deficits continue to grow in this higher interest rate environment.
That means past deficit projections have been revised upwards for the years to come.
The deficit for 2024-25 is now expected to be $38.4 billion — $38.3 billion in the year after and $27.1 billion in 2026-27. Those numbers are higher than Ottawa’s forecast back in March.
The government says it doesn’t expect to post a balanced budget for the foreseeable future.
The situation actually could be even worse than that. The Fall Economic Statement also offers what the government calls a “downside scenario” — one that would see the economy actually slip into a recession.
Deficits would be even higher under this recession scenario, with fewer people working and businesses paying less in taxes.
Freeland tried to sound an optimistic note in her speech to Parliament.
“Inflation is coming down, wages are going up and private sector economists now expect Canada to avoid the post-pandemic recession that many had predicted,” she said.
“Now, I don’t want to deny the reality that many Canadians are facing today. I absolutely understand that after three difficult years — with a global pandemic, global inflation and global interest rate hikes — Canadians are worn out, frustrated and feeling the squeeze.
“What Canadians deserve today is for us to address the very real pain that so many are feeling, with a hopeful and achievable vision for our country’s future.”
To address that pain, Freeland is touting new housing measures above and beyond what Ottawa has already announced.
Starting in the next fiscal year, Ottawa will make $15 billion available in new loan funding under the Apartment Construction Loan Program — an initiative meant to spur the construction of affordable homes.
That program is expected to deliver 101,000 new homes by 2031-32, the economic statement said.
Freeland’s document also offers an additional $1 billion in new spending over three years, starting in 2025-26, to help build more non-profit, co-op and public housing across the country.
About 7,000 new homes will be built in 2028 as a result, the statement said.
Freeland is introducing a new “Canadian Mortgage Charter,” which will give homeowners new rights when facing a mortgage renewal.
The government is also initiating a crackdown on Airbnb and other short-term rental units by making it less lucrative to own these units.
The economic statement proposes to deny income tax deductions for expenses incurred to earn short-term rental income in areas where these units are not in compliance with the local laws.
Those new measures are designed to complement the existing Housing Accelerator Fund — which gives money to cities that cut red tape in the housing sector — the previously announced GST exemption on rental home construction and a first-time homebuyers savings account.
Another affordability measure promised in the economic statement would remove the GST/HST from psychotherapy and counselling “to ensure Canadians can receive the support they need.”
There’s also a new EI benefit for parents who adopt.
All of these measures are in addition to the earlier decision to lift the government’s carbon tax from home-heating oil.
“Canada is not and has never been broken,” Freeland said, addressing one of Conservative Leader Pierre Poilievre’s favourite talking points.
“We are the imperfect but remarkable creation of generations of Canadians who did their part to build a better country — in good times and in tough times, calloused hand by calloused hand. And generations of Canadians who believed — just as I do, today — that better is always possible.”
Conservative Leader Pierre Poilievre blasted the fiscal update, labelling it “disgusting” because it calls for more spending.
“With this $20 billion of costly new spending this update can be summed up very simply: prices are up, rent up, debt up, taxes up, time’s up,” he said.
“Commonsense Conservatives will vote no confidence on this disgusting scheme. After eight years of this prime minister, he is not worth the cost. And today he’s adding another $20 billion to inflation which will put pressure on interest rates,” he said of the planned new spending Freeland’s document.
NDP Leader Jagmeet Singh meanwhile criticized the government for not spending more, branding the document “not even a mini budget. It is a microbudget” given there was relatively little new announced Tuesday.
“It does not meet the urgency of what Canadians are going through. It does not meet their needs,” he said.
“Canadians are feeling really disappointed about the Liberals not meeting the urgency of what they are going through and most of the money that they are promising is delayed,” he said, referencing some housing programs that won’t role out until next fiscal year.