Canada Faces Soaring Debt Costs Amid Economic Challenges, Finance Minister Freeland Reveals

The federal government's fall fiscal update includes $16 billion in funding to build rental and social housing, along with targeted measures to combat inflation. All in, new spending will total about $21 billion as the government faces another whopping deficit.

In a detailed fall economic statement tabled by Finance Minister Chrystia Freeland, Canada is bracing for a significant rise in the cost of servicing its substantial federal debt. This increase is set to consume a larger portion of Ottawa’s revenue than in recent years, marking a challenging economic phase for the country.

Debt Servicing Costs Spike Amid High Interest Rates

According to the economic statement, debt service charges, one of the federal budget’s most costly line items, are projected to rise sharply. From $20.3 billion in 2020-21, these charges have escalated to $46.5 billion in the current fiscal year. They are expected to further increase to $60.7 billion by 2028-29. This surge is attributed to the high interest rates, now at a 20-year peak, impacting the cost of borrowing.

New home construction in a development in Oakville, Ont. (Nathan Denette/Canadian Press)

Federal Government’s Ballooning Debt

Under the Liberal government, which has run a deficit each year since its election, the federal debt has doubled from $619.3 billion in 2015-16 to $1.2 trillion last year. It is anticipated to climb to $1.4 trillion by 2028-29. Kevin Page, former parliamentary budget officer, stated that the rise in debt servicing costs was “inevitable” following the government’s decision to backstop the economy during the pandemic.

Economic Growth and Unemployment Concerns

While the government predicts Canada will avoid a recession, economic growth is expected to slow considerably, with unemployment rising nearly a full percentage point next year. The fall economic statement forecasts an almost stagnant growth (0.4 percent) next year, with an unemployment rate climbing to 6.5 percent in the second quarter.

Finance Minister Chrystia Freeland, confident about Canada to get through this uncertainty

New Spending Initiatives and Housing Measures

Despite these fiscal constraints, Freeland announced new spending initiatives totaling approximately $20.8 billion over the next six years. These funds are primarily earmarked for housing initiatives, including low-cost loans to builders, and climate-friendly projects. Notably, Ottawa will allocate $15 billion in new loan funding under the Apartment Construction Loan Program to foster the construction of affordable homes.

Freeland is also introducing a “Canadian Mortgage Charter” and measures to crack down on Airbnb and other short-term rental units. Additional spending includes $1 billion over three years for non-profit, co-op, and public housing, and the removal of GST/HST from psychotherapy and counselling services.

Political Reactions and Fiscal Outlook

The economic statement has elicited mixed reactions from political leaders. Conservative Leader Pierre Poilievre condemned the update, calling it “disgusting” for its increase in spending and potential inflationary impact. NDP Leader Jagmeet Singh, on the other hand, criticized the government for not spending enough to address Canadians’ needs.

The government’s fiscal policy remains focused on keeping the net debt-to-GDP ratio on a declining trend. However, Freeland suggested a new fiscal anchor, aiming to keep deficits to a maximum of 1 percent of GDP in future years.