The Canadian federal government is facing a growing debt crisis, with interest payments on its debt set to become the top budget priority over the next few years. According to a forecast from the Parliamentary Budget Officer, interest costs are expected to hit $59.3-billion this year, up more than 10% from the previous year. By fiscal 2031, these costs are projected to rise to $83-billion, a significant increase from the $23.3-billion recorded in the prepandemic year of fiscal 2019.
The rise in debt costs is partly due to the spending required to address the economic impact of the coronavirus pandemic in 2020 and 2021. However, the Trudeau Liberals continued to spend heavily, and the Carney Liberals have further increased deficits, particularly due to a surge in defence expenditures. Prime Minister Mark Carney has promised to spend less and invest more, but the government’s projected deficits are higher than in the last year of the Trudeau government.
The Liberals argue that the debt burden relative to the economy is stable, with the net federal debt burden as a percentage of gross domestic product projected to increase by less than two percentage points by the end of the decade. However, this optimistic view is challenged by rising interest costs, uncertain economic forecasts, and the looming costs of Ottawa’s military buildup through to 2035.
The Dodge Rule, articulated by former Bank of Canada governor David Dodge, suggests that debt servicing costs should be kept below 10% of total revenue. The Liberals broke this rule three years ago, in fiscal 2024, and debt servicing costs are now projected to eat up 11 cents of each dollar of federal revenue this year. By fiscal 2031, this figure is expected to rise to 13.6 cents, raising concerns about a potential debt spiral similar to the 1980s and 1990s.