Government has touted savings from locking in long-term financing early in pandemic.
Canada's debt service costs jumped 44% in the first two months of the fiscal year that started in April, taking CAD1.7 billion off the windfall from relaxed Covid restrictions that swung the budget balance to a CAD5.3 billion surplus from a CAD23.8 billion deficit.
Federal government revenue climbed 20% or by CAD12.1 billion in April and May from the prior period in a broad-based gain, the Finance Department's monthly Fiscal Monitor report showed Friday. Program expenses fell 23% or by CAD17.9 billion.
"Results continue to improve compared to the peak of the COVID-19 crisis and the unprecedented level of temporary COVID-19 response measures at the time," the department's report said.
Higher borrowing costs were driven by adjustments on real-return bonds and higher interest rates. The Bank of Canada hiked 25bps in March and 50bps in April, and kept going after May with another 50bps in June and 100bps earlier this month.
Canada still benefits from a triple-A credit rating and relatively low market rates. Ten-year government bonds yielded 2.6% Friday morning in Toronto, though that's up from near record lows around 1.1% about a year ago.
The government is also sitting on CAD104 billion of cash, though nearly half of that could be used to pay out a major legal settlement over the next few years.
Finance Minister Chrystia Freeland presented a budget April 7, spending more than half the windfall from the economic rebound. Former top federal cabinet adviser Kevin Lynch told MNI that fiscal policy should be tightened as fast extra deficit spending was introduced when Covid hit to give the public a clear message inflation will remain under control. (See: MNI: Canada Should End Stimulus Symmetrically- Ex Cabinet Czar)
The budget projected a CAD52.8 billion deficit for the fiscal year that opened April 1, equal to 2% of GDP, and shortfalls through the projection period ending in 2026-27. Federal debt as a percentage of GDP, the lone "fiscal anchor" the government has stuck to since taking power in 2015, declines from 45.1% to 41.5% over this time, remaining above the pre-Covid level of 31.2%.