Will Trudeau’s government breach the David Dodge Rule?
The sharp escalation of global bond yields in recent weeks raises the prospect we may be in the middle of a structural shift to a world of permanently higher borrowing costs.
If true, it would represent a fresh blow to Canadian government finances that only reinforces the need for much more careful budget management from Prime Minister Justin Trudeau’s administration, including the reestablishment of some sort of fiscal anchor.
Global interest rates have been marching higher all summer, with bond yields up almost a full percentage point since April in both the U.S. and Canada to levels not seen since 2007.
Even if they don’t rise further from here, markets are signalling the era of super-low borrowing costs that has prevailed since the Great Financial Crisis may be over.
This poses a problem for the federal government, whose heavy borrowing over the past three years was premised on the idea that interest rates would remain at historically low levels.
Finance Minister Chrystia Freeland’s budget earlier this year projected that government borrowing rates would settle in between 2.5 per cent and three per cent, depending on duration. Right now, bond yields are ranging from 3.5 per cent on the 30-year bond to 4.8 per cent on two years.
Should these rates persist, the impact on the nation’s fiscal path would be meaningful.
According to the finance department’s own sensitivity analysis, a one percentage point increase in interest rates would add $3.8 billion in charges in the first year, with the cost rising to $10.3 billion in five years.
The net impact on the bottom line would be lower than that, as higher public debt charges are partly offset by some additional revenue for the government that comes with higher interest
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