CP

Cost of servicing federal debt lowest in 50 years

Even with $30-billion deficit, we're less in the hole than U.S.

But deficit spending can’t fix oil crash, BMO says Canada’s policymakers are still haunted by that day in 1995 when the Wall Street Journal declared the country “an honorary member of the Third World” for our enormous public debt burden. With Finance Minister Bill Morneau confirming on Monday that Canada is back to serious deficit spending, some are worried we’re headed back to that Third World status. That’s very unlikely. Thanks to rock-bottom interest rates all over the developed world, the cost of borrowing money is at a historic low — basically as low as it gets (unless the Bank of Canada moves to negative interest rates). In fact, as Unifor economist Jordan Brennan pointed out on Twitter, the share of federal spending that’s going to covering debt is the lowest it’s been in half a century.

Fed govt debt servicing reaches a half century low - a fact likely to be overlooked in the deficit hysteria #cdneconpic.twitter.com/BAYPjUsnga — Jordan Brennan (@JordanPWBrennan) February 22, 2016

Morneau’s fiscal update predicts next year’s deficit will be five times as large as what was projected just three months ago, hitting $18.4 billion in 2016/17 — and that’s not including the Liberals’ deficit-spending promises. Take those into account, and Ottawa faces $52 billion in deficits over the next two years, by HuffPost Canada’s calculations. But looking at the new numbers, the economists at Canada’s big banks don't sound scared. “Even a $30-billion deficit would amount to only 1.5 per cent of GDP, and the U.S. has been congratulating itself on getting its federal deficit down to a low of 2.5 per cent,” noted CIBC chief economist Avery Shenfeld. BMO’s Douglas Porter and Robert Kavcic pointed out that interest rates are even lower today than the government had been expecting, and the savings on interest payments alone will come to $1.5 billion a year for the next three years. “In our view the government has the flexibility to provide fiscal stimulus to a Canadian economy that badly needs it,” National Bank economist Marc Pinsonneault wrote.