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Canada to spend more on debt after rate forecasts edge higher

Canada's government has announced it will spend an additional $1.9 billion on debt costs for the 2024-25 fiscal year, revising its previous budget estimates due to a higher outlook for interest rates. This adjustment brings the total debt payments to $56 billion for the year, representing a 3.5% increase from the forecasts made in April by Finance Minister Chrystia Freeland.

Treasury Board President Anita Anand explained that the increased debt costs are primarily due to higher projected interest rates and greater borrowing needs. The supplementary estimates submitted to lawmakers indicate an extra $764 million will be required for interest on debt that has not yet matured, along with $1.1 billion for other interest-related costs.

This rise in debt payments underscores the vulnerability of Canada's fiscal plans to shifts in interest rate expectations. Although the Bank of Canada is anticipated to start lowering its benchmark overnight rate, currently at five percent, uncertainty remains over the timing and extent of rate cuts by the U.S. Federal Reserve. The U.S. is facing stronger-than-expected economic growth and persistent inflation, adding to the unpredictability.

In its budget, the Finance Department based its projections on private sector forecasts from March, assuming the three-month treasury bill rate would average 3.8% in 2024 and 2025. It also expected the yield on a 10-year Canadian government bond to average 3.25% over the same period.

Assuming no changes to revenue, and factoring in reduced payouts for elderly benefits, these updated numbers suggest that Canada's deficit for the year could exceed the $39.8 billion previously forecasted. This development highlights the fiscal challenges the country faces amid fluctuating economic conditions and evolving monetary policies.



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