Canadian public policy think tank Fraser Institute warns that federal government interest costs could increase to $35 billion in 2021 - 2022, an increase of $13 billion if interest costs return to 2019 - 2020 levels.
"If interest costs increase, governments across Canada could see their already large budget deficits grow even larger," said Frasier Institute senior economist Jake Fuss.
The federal government produced massive deficits in succeeding years—$381.6 billion last year and $363.4 billion the current year, according to the Western Standard. According to the Fraser Institute, the federal government spent $17,091 per Canadian in 2020 - 2021.
"BO projects budgetary deficits of $363.4 billion and $121.1 billion in 2020-21 and 2021-22, respectively. Relative to the size of the economy, the deficit in 2020-21 amounts to 16.5 percent of GDP—the largest budgetary deficit since the beginning of the series in 1966-67," reads a March PBO report.
Finance Canada and PBO estimate the total federal COVID-19 response measures amount to $331 billion. By applying the 2.0 percent interest costs from 2019 - 2020 to the gross debt projections provided in Budget 2021 for the five-year period, the result is a rise in interest costs of $34.9 billion.
The study answers a simple question: What would happen to government interest costs—interest paid on outstanding debt—and government budgets if interest costs returned to the near-historically low levels of 2019 - 2020?
Cumulatively, interest costs and deficits would increase by a total of $17.0 billion in 2021 - 2022 should interest costs return to their 2019 - 2020 levels. The forecasted increase in federal interest costs for 2021 - 2022, $13.1 billion, assuming interest costs return to their 2019 - 2020 level represents 77.4 percent of the total increase in interest costs for the federal and provincial governments.
The study finds that the federal government and every provincial government— except New Brunswick—would experience an increase in interest costs in the fiscal year 2021-22. Combined, these costs would rise from $53.6 billion—the current projection based on the latest government budgets—to $70.6 billion, an increase of 31.7 percent.
"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," said Jason Clemens, executive vice-president at the Fraser Institute and the study's co-author.
The federal and nine provincial governments—except New Brunswick—all experience an increase in their interest costs.
The largest dollar value and percentage increase are recorded by the federal government; interest costs rise from a budgeted $22.1 billion in 2021 - 2022 to $35.2 billion, an increase of 59.4 percent. The smallest percentage increase is recorded by Quebec whose costs increase by 3.4 percent.
The Fraser Institute encouraged governments across the country to employ more caution regarding spending and borrowing, particularly in Ottawa.
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