Canada’s debt problems are approaching the point of no return, likely cementing the end of the low-rate era. The Parliamentary Budget Officer (PBO) broke down federal spending and revenue for 2026-27. While critics focus on corporate welfare and loose spending, the real issue is much worse. The data reveals that over a quarter of revenue is already allocated to debt and elderly benefits. That amount is set to surge to over a third of all revenue by the end of the 2020s, suggesting a structural deficit and the end of Canada’s low-rate era.
Credit Is A Market, Rates Are Determined By Supply & Demand
First off, no person left behind—so let’s all get on the same page by reviewing how interest rates work. The Bank of Canada (BoC) uses policy to influence rates, but it’s ultimately determined by the market. Rates move lower when there’s an excess of capital (supply) relative to borrowing (demand). They move higher when borrowing needs grow faster than the capital to lend. When everyone wants to lend you money, you pay less. If no one wants to lend you money, returns (interest paid) need to rise to motivate.
The concept applies to borrower quality. The federal government pays the lowest rate, since they issue the currency, it’s kind of hard to default. This establishes a benchmark rate used to determine borrowing costs for us schmucks. Lower-quality borrowers pay more, as they have to provide incentives to cover risk and reduced liquidity.
Public borrowing doesn’t just impact the government costs, but the impact flows downstream. This is part of the reason government-backed loans may reduce the cost to certain borrowers, but that premium is sent downstream to those not blessed by taxpayer subsidies.
Monetary policy can also create temporary relief. However, that scale creates an even bigger risk of failure—as I previously explained to Parliament’s finance committee. However, you’ll only need the 10,000 ft view of credit markets to understand today’s problem.
Congrats! You’re now more informed than most policymakers on the topic. On to the Spring Update!
Canada To Spend Over 1 In 10 Dollars On Interest Payments
PBO data shows the Federal government has $502.8 billion in spending authorities for 2026-27. Out of that, the report shows $272.4 billion is statutory authorities, already authorized spending under existing legislation. The remaining $230.4 billion is voted authorities, requiring a vote. Not a major hurdle for the current government since they have a majority mandate secured.
Source: PBO.
Boring, but important to put the scale of debt in context. Public debt charges are estimated to represent $53.7 billion of spending, just over 1 in 10 dollars (10.7%)—up from 9.5% ($4.7 billion) from a year prior. Nearly a tenth of government revenues has already been spoken for by past government spending.
Even more remarkable is the fact that it’s not stopping there. The PBO’s forecast shows the share of revenues spent on interest will hit 13.2% of revenues by 2030-31. Almost 1 in 8 dollars of that is just to service debt. Even if policymakers didn’t spend another dollar, Canadians are projected to spend 2.1% of GDP to worship service the debt.
To understand the scale, let’s look at the Canada Health Transfer. This is the program that distributes funds across provinces to ensure universal access. It’s the largest federal transfer program, estimated to hit $57.4 billion in 2026-27, up 5% (+$2.7 billion) from last year. That’s only 0.7 points higher than the amount used by debt charges. If healthcare scales as a consistent share of the budget, it falls behind debt charges by 2030.
“Public debt charges have increased significantly over the last three years due to a substantial increase in the stock of public debt over the course of the pandemic combined with subsequent higher effective interest rates,” writes the PBO.
They also don’t see any improvement: “PBO anticipates that public debt charges will continue to increase both as a share of government revenues and as a share of nominal GDP…”
Canada’s Debt & Elderly Benefits To Consume A Third of Revenue
Debt charges aren’t even the largest liability Canada has baked into its economy. That honor goes to Canada’s rapidly aging population. The PBO specifically cites Old Age Security (OAS) as a concern, pushing elderly benefits to $89.3 billion in 2026-27, up 7.5% (+$6.2 billion). That liability hits $108.5 billion by 2030-31, making it ~60% larger than the Canada Health Transfer.
Source: PBO.
The PBO warns that OAS is “currently the largest federal program,” with elderly benefits accounting for “approximately one in every six dollars of federal spending.” A growing senior population and inflation are driving the growth, they warn. That means higher inflation is tied to higher OAS liabilities, and higher rates mean higher debt charges. Well, $@$%.
The current estimate means that over 1 in 4 (27.7%) dollars are already spent on just debt charges and elderly benefits. By 2030-31, the Federal government estimates this will rise to over a third (35.2%). Canada wouldn’t even qualify for a mortgage with that level of liabilities.
Canada’s Deficit Appears Structural, Amplifying Vulnerability
The combination all but guarantees that Canada’s deficit is now structural. A structural deficit isn’t just a short-term imbalance, but one baked into the system. It doesn’t matter if the economy is booming or in recession, policymakers need credit.
Canada’s highly indebted households already mean the economy is vulnerable to a shock. Ottawa’s fiscal position amplifies that risk. As policymakers are increasingly exposed to fixed costs, it becomes much harder to pretend every crisis is avoided with more debt. It’s even harder to pretend that “affordability” measures that resemble bailouts are free.
Much of the debt accumulated was presented as affordability help for households and businesses. Ironically, it’s doing the opposite over the long term. It’s hard to see a wave of investors scrambling for lower returns, dedicating capital at a pace that outpaces our persistent borrowing needs. Even if a guy in a slick suit claims those investors will be coming—we just need to buy a Monorail first.
Why lump elderly benefits in with debt? It feels ageist. The current elderly paid into the system for decades. Surely the government realized that people would be receiving benefits at some point. Fiscal incompetence.
Unfortunately OAS is paid for annually by the federal budget. It is not like CPP, which is paid for in advance by workers investing over time. No one contributes to it in advance.
It doesn’t matter if you paid your taxes for decades, there aren’t enough young workers now with good jobs able to keep up with OAS needs of the country. Debt is similar – it’s now becoming a runaway train.
How would you fix it?
I would develop Canada’s resources, drop the restrictive regulations and carbon climate agenda that prevent that (and no purchaser will pay for), and fix the trade relationship with the United States. Less government at all levels that puts a drag on the economy, less borrowing that fuels inflation, resulting in lower taxes for everyone. There is no way that a resource-rich and well-educated country like Canada should be collecting income taxes for anyone earning less than $50,000 annually. If we have money for ideologically-driven foreign “aid” projects and war in Ukraine, then we have money for the basics that make all Canadian lives better. Lastly, we need to prevent criminal cartels from money laundering through Canadian banks. You can bet that these bad actors aren’t paying taxes on their ill-gotten gains .. just making life worse for Canadians.
Excellent summary. Canada is not 9nly in serious trouble, almost entirely due to bad choices by the current government, we are continuing down the same bad path.
At this point, the focus should be on fixing the deficit, resuming us trade talks, cutting waste and corruption.
The problem is amplified not only by ultra high consumer debt, corporate debt, a collapsing real gdp per capita, but also massive unfunded liabilities of the current govt.
Consider that housing in the two biggest markets is down in value substantially, the chmc and banks continue to misuse fake appraisals to justify lending, often now to investors, transferring a guaranteed risk from banks onto the govt.
The cdic, chmc, etc, and so on do not have a trillion dollars to fund claims from banks and individuals when the defaults snowball here. So for the big 6 banks, who do have way to much exposure here as well, the govt will need at least that much to maintain our counterparty payments system.
So the same banks who profited highly on all of this, will get bailed out, like in the usa, and Canada’s debt will end up like Japan. However, since Japan’s debt is mainly due to their pension fund and bad actuarial calculations, our will be to back fund bank profits???
This is all exacerbated by a govt so inept, corrupt, and dishonest that they have now intentionally misled canadians about all of this for 5ys?
The pbo is absolutely right, we can’t afford a 90 or more likely 280b train to cottage country, we can’t afford to put 5% of our gdp into defense, we can’t afford carney’s corporate welfare / slush fund for infrastructure (which is described as a norway/alberta style royalty fund, but is in fact just another version of their failed infrastructure bank?).
To fix this mess we need another paul martin / harper style fiscal contraction budget, not trying to join the eu, or whatever carney is proposing. Finally, while it may be popular with the bobble head nationalists in central canada, the current trade war being played by carney is a complete disaster. I don’t like trump, but come November, he will no longer be an issue, make a deal with the usa and protect our economy.
The appalling conflict of interest related to this trade war is abysmal. Carney can’t afford to lose support by making a deal with trump. He can’t afford to lose support by not wasting g b
Hundreds of billions on bad projects, he can’t afford to lose support by setting off a housing collapse, so he will spend our money (or just borrow more) to keep the appearance that he isn’t destroying this country.
Frankly the simple fact is, while jt was a terrible pm, as was his father, carney may be worse than both.
The household fallacy is the belief that the federal government should act like a budget-conscious family and spend cautiously. But a household does not own a central bank which can create funding at will, nor is it responsible for stimulating a recessed national economy where currently 1.55 million Canadians suffer unemployment.
For a monetarily sovereign country like Canada, fiscal space in practical terms depends not on money funding but on available real resources that can be purchased without inducing a rise in prices. If the unemployed were put back to work, they could increase production of goods and services that reduce inflationary pressures.
However, caution is indeed advised when considering military spending. If Canada and all NATO countries increase budgets to 5%, it will likely stoke an arms race with non-NATO countries, and exacerbate climate change by military activities that significantly increase greenhouse gas emissions. A more dangerous and unsustainable world is what we cannot afford.
I would say the bad fiscal choices were primarily the previous government. This one really just got started last month. I agree there need to be substantial cutbacks, to reoccurring costs. One-off expenses like projects are the least of our worries.
Now that Carney has a majority maybe he will make the hard choices and finally start cutting back, as well as change corporate tax system to prioritize growth. We should know within the next year.
Identifying the housing collapse as the cause or responsibility of the current government is incorrect- it was the result of decades of speculative growth. All bubbles have to pop. Smart economists let markets correct and don’t try to prop them up.
Boomer’s gonna boom.