Ottawa borrowed heavily without locking in at low rates. The refinancing is getting painful

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OTTAWA — One-third of Canada’s debt will be refinanced this year at elevated interest rates, a significant cost to taxpayers that Conservatives argue could have been avoided if the government had issued more of the country’s debt in the form of long-term bonds when rates were lower.

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Canada has just over $1.4 trillion in debt — more than double the $619 billion owed in the Liberal government’s first year — borrowed using bonds ranging between two and 30 years. But critics point out that the government’s heaviest borrowing, during the COVID pandemic, was done via shorter-term bonds.

This year, $414 billion of the national debt will be refinanced. During the pandemic, the Bank of Canada’s central rate was as low as 0.25 per cent; it’s now five per cent.

During a House of Commons finance committee meeting earlier this month, Conservative MP Adam Chambers argued that the government could have managed its borrowing better by issuing bonds for longer terms at cheaper rates years ago. He compared Ottawa’s short-term borrowing habit to Mexico, which has relied on longer-term bonds.

“The government of Mexico’s average yield to maturity of their debt is around 18 years; 59 per cent of Mexico’s debt is in 10-year bonds or longer,” he said. “Sixty per cent of the debt we issued during COVID was three years or under. That’s all renewed now. At four or five per cent interest rates instead of being locked in at, say, one per cent for 10 years.”

The government also plans to borrow an additional nearly $70 billion this year in new debt.

The country’s debt-servicing costs, the cost of the interest the government pays, will be $54 billion this year, rising to $64.3 billion by the end of the decade.

Finance Minister Chrystia Freeland was quick to defend the government’s approach at committee and pointed out that a comparison with Mexico ignores that Canada has a healthier balance sheet.

“It’s an interesting choice to contrast Canada’s fiscal position, our credit rating, our debt management with that of Mexico,” she said. “I haven’t talked to every single person in Mexico, but I talked to their government a lot. They would cheerfully trade their position for ours, given our triple-A credit rating.”

For Canadian government debt, the average number of years to maturity is 6.9 years, which puts it in line with other triple-A rated countries.

The truth is, the decision of the government during COVID to issue short term debt was absolutely negligent

Ontario’s government has also extended the long-term financing of its debt, issuing $137 billion, or about a third of the province’s debt, in 30-year bonds.

Very little of the federal government’s debt is on terms that long.

In 2022–23, Freeland’s department had about 36 per cent of Canada’s debt in longer-term bonds — anything over 10 years is considered long term —  down from about 45 per cent in 2021–22. Next year, it targets having about 33 per cent in longer-term bonds, but the majority of Canada’s debt is now in bonds that are less than five years.

Chambers said the government missed a chance to lock in debt at lower rates, and that could cost taxpayers between $7 billion and $10 billion annually.

“The truth is, the decision of the government during COVID to issue short term debt was absolutely negligent,” he said at committee.

Finance Department officials who spoke on the condition that they not be named said the government did push to lend on extended terms during the pandemic, but found the market’s appetite for longer-term debt was limited.

Most Canadian government bonds are purchased by Canadian financial institutions including banks and pension funds, but some international institutions are also lenders.

Canada’s triple-A bond rating, which it has maintained for more than 20 years through successive governments, makes borrowing cheaper than for a triple-B-rated country like Mexico.

Freeland said Canada’s good credit rating is proof the government is being financially responsible.

“This is a powerful, independent, objective proof point. A triple-A credit rating means Canada’s economy is strong and resilient,” she said.

National Post
rtumilty@postmedia.com

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