Rising Interest Rates Threaten to Inflate Canada's Federal Budget Deficit
Canadian economists warn that climbing bond yields and elevated inflation are increasing federal borrowing costs ahead of the November 5 budget, with sustained higher rates potentially adding billions to the deficit over the coming years.
Canada’s federal budget, scheduled to be unveiled on November 5, faces mounting pressure from rising interest rates and elevated inflation that are driving up the cost of government borrowing. 
Over the past four months, Canada’s 10-year government bond yield has climbed to 3.8 per cent from 3.4 per cent. The increase is already translating into heavier financial obligations for Ottawa. Federal debt charges rose by 3.3 per cent in April and May compared to the same period a year earlier, reaching $9.9 billion due to higher interest rates.
Cynthia Leach, deputy chief economist at Royal Bank of Canada, stated that higher rates and larger deficits in Budget 2026 will push public debt charges higher as a share of revenue. The potential scale of the fiscal impact was outlined in the last budget, which estimated that a 100-basis-point increase in interest rates over a sustained period would increase the deficit by $8 billion over four years.
Looking further ahead, Randall Bartlett and LJ Valencia of Desjardins Group estimated that if bond interest rates remain at current levels over the five-year period of the Spring Economic Update, it could cost Canadian coffers an average of $3 billion annually starting in fiscal year 2028. They also noted that an increase of 50 basis points to long-term rates above four per cent could trigger a sustained increase in the ratio of federal debt to gross domestic product starting in 2027. 
Despite these pressures, Canada retains certain advantages relative to its peers. Global investors are likely to give Canada more budget slack than huge debtors like France and the United States due to its lower debt and deficits. However, maintaining the credibility of the country's fiscal plans remains crucial to preserving its credit rating standing.