The decision by Fitch Ratings to downgrade America’s credit rating this week has sparked a debate: Was it justified, in light of the country’s deteriorating finances, or unwarranted, considering its resilient economy?
One thing can’t be argued: America’s interest burden – the cost of servicing its swelling national debt, a key weakness cited by Fitch – is soaring.
In the first nine months of the fiscal year, which starts Oct. 1, the U.S. paid US$652-billion in interest costs, a 25-per-cent jump from the same period the year before, driven by higher interest rates. In its downgrade, Fitch warned that, over the next decade, “higher interest rates and the rising debt stock will increase the interest service burden,” even as spending on social services for the elderly is predicted to explode.
Canada’s federal finances are facing their own interest crunch, even if the overall fiscal picture is less dire than that of the U.S.
Over the 12 months ending in May, Ottawa spent $36.5-billion on its public debt charge. As Doug Porter, chief economist at Bank of Montreal noted this week, that’s a 50-per-cent increase since early 2020 and is rising quickly.
Despite the spike, federal interest payments in Canada remain historically small relative to total revenue, about 8.4 per cent, up from 6.5 per cent a year ago. That’s a far cry from the mid-1990s, when interest costs gobbled up a third of what Ottawa took in from taxes and other revenue sources.
Even so, a rising interest burden means more money to service debt that otherwise could go to public services and government programs. Canada is on track to see interest costs rise to more than $44-billion next year, close to what Ottawa plans to spend on the Canada Health Transfer and more than it will spend in total on the Canada Child Benefit, its child care initiative and support for municipal infrastructure projects.
Decoder is a weekly feature that unpacks an important economic chart.
Jason Kirby