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Even though interest rates are projected to rise over the coming years, Parliamentary Budget Officer Yves Giroux says Ottawa’s debt servicing costs will remain at historically low levels when measured as a percentage of tax revenues.Adrian Wyld/The Canadian Press

The cost of financing the federal debt is projected to exceed $40-billion a year by 2025-26 – more than double the cost at the onset of the COVID-19 pandemic, according to a new report from Parliamentary Budget Officer Yves Giroux that says Canada’s debt costs will grow more quickly than what the government has forecast.

The PBO released its economic and fiscal outlook Tuesday, providing an independent assessment of the direction of federal finances ahead of the government’s 2022 budget. Finance Minister Chrystia Freeland has not yet set a date for the budget, but public consultations on the matter closed last week. Last year’s budget was released in April.

Russia’s deadly invasion of Ukraine – and the harsh global sanctions imposed on Russia in response – adds a high level of uncertainty to economic projections as the federal government finalizes its budget plans. Statistics Canada reported Tuesday that the Canadian economy grew by 0.2 per cent month-over-month in January, beating analyst expectations.

Several provincial governments have recently announced that their fiscal projections have improved. Alberta announced last week that it expects to post a surplus next year after eight years of deficits.

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The PBO’s projections for the federal deficit over the coming years are largely in line with the figures Ms. Freeland released in December in the government’s fall economic and fiscal update.

However, the underlying PBO numbers related to public debt spending do show a divergence from Finance Canada’s numbers.

Tuesday’s PBO report says public debt charges will more than double between 2020-21 and 2025-26, rising from $20.4-billion to $43.5-billion, and growing further to $46-billion in 2026-27.

In contrast, the government’s December projections showed public debt charges rising to $38.6-billion in 2025-26 and $40.9-billion in 2026-27.

The major deficit spending related to the pandemic contributed to pushing the size of the federal debt above $1-trillion for the first time in 2020-21.

Even though federal deficit spending during the COVID-19 pandemic reached levels not seen since the Second World War, and even though interest rates are projected to rise over the coming years, the PBO says Ottawa’s debt servicing costs will remain at historically low levels when measured as a percentage of tax revenues.

This measure – known as the debt service ratio – will reach 11.5 per cent in 2026-27, according to the PBO. The report notes this is well below the peak of 48.3 per cent that was recorded in 1990-91.

In the near term, the PBO projects a deficit of $139.8-billion in the current fiscal year that ends March 31. The government had projected a deficit of $144.5-billion. For next year, the PBO projects a deficit of $47.9-billion, compared with the government’s estimate of $58.4-billion.

Neither of the two sets of numbers account for all of the spending promises outlined in the Liberal Party’s 2021 election platform. The PBO report estimates that about $48.5-billion in new spending promised in the platform has not been accounted for in its forecast.

While March is a common month for Ottawa to table a budget, Bank of Montreal chief economist Doug Porter said it may make sense for the government to wait until April this year in light of the economic shock related to the Russian invasion of Ukraine.

“It’s an incredibly complex situation,” he said.

He noted that long-term government bond yields have been holding at around 2 per cent or less, showing that Ottawa’s borrowing costs remain low.

Key budget decisions are generally made internally well before a budget is released to the public. Mr. Porter said it would make sense in the current environment for federal officials to avoid locking in major budget moves right now.

“Definitely the situation in Ukraine complicates matters,” he said in an interview. “It both puts upside risk to inflation and downside risks to growth … so I I think it probably makes sense to stand pat for a week or two just to see how things unfold.”

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