While its common knowledge that interest rates in Canada have increased rapidly over the last couple of years — what’s not as commonly known is how this will affect the Government of Canada.

In short, the current economic conditions mean that the Government of Canada’s interest expenses are expected to triple this decade.

Increasing Total Debt

In 2023, the Government of Canada owed $1.259 Trillion dollars, mostly to bondholders. The Parliamentary Budget Officer expects government debt to increase to $1.829 Trillion by 2029.

Source: The Parliamentary Budget Officer

The problem is that not only is the total debt is set to increase, its that bonds work (sort of) like mortgages, in that they have an expiry dates where they “renew”.

Upon renewal, the interest rates are renegotiated back to market rates (this is known as maturity). As bonds renew into higher rates, the Government’s interest costs go up.

This combination of increasing renewal costs for existing debt, and ever-increasing additions to the total debt, means that the Government’s cost of borrowing has been surging recently.

In fact, the PBO now estimates that the Government of Canada paid 40% more interest year-over-year in both 2022-2023.

It also estimates that the Government of Canada will forced to payout $60 Billion in interest payments per year by 2029, which is triple the amount that was owed in 2021.

How much is $60 Billion?

$60 billion is more than the government currently spends on its Child Care Benefit program its Employment Insurance Program (including parental leaves), and its almost as much as it spends on its entire Old Age Security and Old Age Supplement programs. (see expenses below, in $B)

Source: Hillnotes.ca

As of 2024, the Government of Canada is now spending over 10% of all of the money it collects simply to pay interest.

What’s clear is that not only do higher interest rates affect Canadians personally — they also affect Government entities.

These higher Government interest costs mean one of three things for Canadians: less service, more government borrowing or higher taxes. Afterall, the money needs to come from somewhere.

Lets see where the government steers the ship from here.