Canada’s government says it will spend more on debt costs this year as it updates its forecasts to reflect a higher-than-expected outlook for interest rates.

The country will spend $1.9 billion more on public debt charges in the 2024-25 fiscal year than it had planned in last month’s budget, according to new expenditure estimates submitted to lawmakers on Thursday. That would lift total debt payments to $56 billion this year, a 3.5 per cent increase compared to the forecasts outlined in April by Finance Minister Chrystia Freeland. 

The increased costs are “primarily due to higher projected interest rates and higher borrowing requirements,” according to the supplementary estimates submitted by Treasury Board President Anita Anand, and include an additional $764 million in interest on debt that hasn’t yet matured and $1.1 billion in “other interest costs.”

The larger debt payments highlight the sensitivity of Canada’s fiscal track to changes in the outlook for interest rates. While the Bank of Canada is expected to start cutting its benchmark overnight rate from five per cent in the coming months, there’s mounting uncertainty about when and how deeply the U.S. Federal Reserve will begin easing monetary policy amid stronger-than-expected economic growth and sticky inflationary pressures.

In the budget, the Finance Department assumed the three-month treasury bill rate would average 3.8 per cent in 2024 and 2025, based on private sector forecasts collected in March. The yield on a 10-year Canadian government bond was expected to average 3.25 per cent over those years.

Assuming no change to revenues, and combined with lower payouts for elderly benefits, the updated numbers suggest a larger deficit than the $39.8 billion forecast this year.