The more outstanding debt that Canada accumulates, the more it must pay in interest costs. It’s a simple concept in the abstract, but laying out the actual numbers shows how stark the situation really is.
A new Fraser Institute study does just that, calculating the change in government interest costs and budget balances if interest costs return to their near-historically low 2019-20 levels.
The authors show that the federal government’s interest costs could rise nearly 60 percent to $35 billion in 2021-22 — a sharp increase of $13 billion from the previous year.
The study also finds that the federal government faces the greatest risk of higher interest costs. While all the provinces, excluding New Brunswick, experience increased interest costs in their calculations, the largest dollar value and percentage jump is recorded by the federal government. Its increased cost represents 77.4 percent of the total potential increase faced by all governments in Canada.
This presents a worrying situation for a country already ravaged by the COVID-19 crisis that has hampered much of the economy for over a year. Interest costs could further stunt Canada’s growth just as it is looking to recover, says Jason Clemens, executive vice-president at the Fraser Institute and study co-author.
“As the country recovers from COVID, if policymakers want to avoid a further erosion of government finances, they must exercise more control over debt-financed spending.”
