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Record-low interest rates are saving federal and provincial governments billions more than forecasted. This will result in lower deficits than projected and provide good opportunities for increased public investment to stimulate the economy.

The federal government’s long-term borrowing rate dropped to 2.14 per cent in July: the absolute lowest rate on record. Its ten-year borrowing rate dropped as low as 1.58 per cent and has averaged 1.92 per cent so far this year: less than half the four per cent rate projected in the 2011 budget and below the 2.2 per cent rate projected in this year’s budget. Meanwhile short-term borrowing rates have dropped below one per cent—well below the rate of inflation. Costs of borrowing have also plummeted for provincial and municipal governments.

Low interest rates are yielding major cost savings for governments. CIBC economists calculate lower interest rates since 2007 have already saved federal and provincial governments $80 billion in lower debt charges, including $25 billion this year alone. These savings will grow in coming years. Ten-year borrowing rates are now expected to rise to only 3.5 per cent by 2016, at least 100 basis points below what recent federal and provincial budgets projected. Ontario’s recent $1 billion bond issue allows it to borrow over 10 years at less than 2.5 per cent: well below the rate projected in its budget.

The federal government should save an extra $300 million from lower long-term interest rates this year, rising to $2 billion in 2016 as more debt rolls over, and totaling $6 billion during the next five years. Estimated interest savings in 2014 will amount to more than the $1.3 billion deficit. The federal government could achieve higher savings in future years by accelerating its shift from short-term borrowing into long-term bonds.

Ontario should realize at least $200 million in interest savings this year compared to its budget estimates, rising to $1.7 billion in 2015 as more debt rolls over, and approximately $5 billion during the next five years. These savings could be increased if the province retires debt at a faster pace. These savings are in addition to the $3.3 billion lower deficit the province recently reported in its public accounts for 2011/12, which was largely due to lower program spending.

It’s time to invest

At these rock-bottom interest rates and with the economy in the doldrums, governments should invest more to stimulate economic growth, as a number of traditionally fiscally conservative and bank economists have argued. While this will increase deficits over the short-term, higher economic growth will more than compensate for these interest payments, reducing deficits and debt-financing ratios over the longer term.

This applies not only to growth enhancing public infrastructure investments, but also to spending on public services. The biggest threats to Canada’s economy now are record levels of household debt and the impact a housing bust could have on the entire economy.

Increased spending on key public services can relieve the rise in household debt and reduce these threats to our economy.

Low public borrowing rates also mean governments have even less justification for privatizing public services and public-private partnerships, which rely on much more expensive private financing.


  • Read more in the Fall 2012 issue of Economy at work, written by CUPE’s Senior Economist, Toby Sanger.

    Economy at work breaks down economic issues that affect average Canadians. Wages, inflation, the cost of housing and education, investment in public services—these are the economic issues that matter to Canadian workers.