The federal government will rack up deficits $8 billion higher than expected over the next two years, according to a new report by Canada's federal budget watchdog.

In its latest economic and fiscal outlook, released on Monday, the Office of the Parliamentary Budget Officer says the federal government will face a budgetary shortfall of $22.1 billion this fiscal year — $4 billion higher than the estimate the government presented in its latest budget in February.

It's much the same story for 2019-20, when the PBO predicts the government will post a $21.4-billion deficit compared to the government's estimate of $17.5 billion.

The report says there is only a five per cent chance the federal books will return to either balance or surplus by 2020-21, with that chance rising to 25 per cent the following year.

Rising debt service costs

The budget watchdog cites several factors that are driving up its estimates, including higher debt service costs, direct program spending and children's benefits.

Conservative finance critic Pierre Poilievre cited the PBO's findings Monday as proof the federal Liberals will spend more on government and debt interest than they originally promised in February.

"We will be spending — under this government's plan — more for nothing," said Poilievre.

Conservative finance critic Pierre Poilievre says the government has underestimated the cost of its programs, contributing to a higher debt load for future generations. (Sean Kilpatrick/Canadian Press)

With interest rates on the rise, the cost of paying down Canada's debt is expected to grow from about $24 billion this fiscal year to just under $40 billion in five years, according to the PBO's report.

"More and more of our tax dollars will go to fund wealthy bond holders who lend money to the government, and less and less of it will be available for vital services that Canadians rely upon," said Poilievre.

A spokesperson for Finance Minister Bill Morneau defended the government's economic track record, noting that the size of Canada's debt relative to the size of its economy is shrinking.

"The PBO and our government both come to the same conclusion when it comes to our fiscal health, showing that the debt-to-GDP ratio ... remains the best in the G7 and continues on a downward track," said Chloe Luciani-Girouard.

Impact of carbon tax

The office of the PBO also said it expects that the Trudeau government's push to put a price on carbon will act as a drag on Canada's economy.

Based on analysis conducted in 2016 by Canada's Ecofiscal Commission, the budget watchdog projects that GDP will be half a percentage point lower in 2022 than it would be without a price on carbon, amounting to a $10-billion loss that year.

However, the report notes there are ways to mitigate the impact of the government's carbon pricing scheme.

If provinces and territories were to use revenues from a price on carbon to reduce corporate or personal income taxes, the impact of a carbon price would be significantly lower, according to the PBO's report.

Estimates by the Ecofiscal Commission suggest that using carbon tax revenues to reduce corporate income taxes would essentially nullify the impact of a price on carbon on Canada's economy in 2022.

Conservative MP Pierre Poilievre is demanding the government tell Canadians how much more they'll pay for gas, heat and groceries under its proposed carbon tax scheme. (Joseph Tunney/CBC)

But Poilievre is also accusing the government of hiding the costs of a carbon tax from Canadians.

"They want Canadians to pay up without knowing how much it's going to cost," said Poilievre.

The Conservative MP has said he will ask the House of Commons this week to force the government to reveal just how much more Canadians will have to pay for gas, heat and groceries once a $50 per tonne carbon tax is in place.

Higher costs, less revenues

In a second report released on Monday, the Parliamentary Budget Office reviewed 10 initiatives put forward in Budget 2018, including the Canada Workers Benefit, improved access to the Canada Child Benefit, shared parental leave and cannabis taxation.

The report comes after changes last fall that expanded the budget watchdog's mandate to include estimating the cost of election campaign promises. Ahead of the upcoming 2019 federal election, the PBO is using this year's budget to test its ability to cost policy initiatives quickly.

Overall, Parliamentary Budget Officer Jean-Denis Fréchette and his team projected higher costs and lower revenues than the government estimates.

For example, the watchdog is expecting higher costs for the Canada Workers Benefit and lower revenues from a tax on cannabis.

"The government is underestimating the cost of its highly expensive programs and a result, taxpayers are going to have to pay more and future generations will have more debt," said Poilievre.

"More debt interest, higher taxes, a smaller GDP. That is the Liberal plan."