Rising interest rates and higher deficits will increase public debt charges and could wind up being a thorn in the side of public finances, economists are warning as Ottawa prepares to unveil a new budget on Nov. 5.

Government bond interest rates have risen around the world, including for Canada, where the 10-year yield has risen to 3.8 per cent from 3.4 per cent in the past four months.

Elevated inflation and increasing expectations for higher interest rates are boosting the cost of borrowing, but the global bond market is demanding borrowers pay extra for longer-dated debt, partly because of elevated government debt levels.

Rising rates pressure all borrowers, including the federal government, Cynthia Leach, deputy chief economist at Royal Bank of Canada, said.

“Higher rates and larger deficits in Budget 2026 will push public debt charges higher still as a share of revenue versus the spring update’s upward path,” she said in a note on Oct. 26.

She pointed out the last budget estimated that a 100-basis-point increase over a sustained period would increase the deficit by $8 billion over four years.

Federal debt charges rose by 3.3 per cent in April and May from the same period a year ago to $9.9 billion on higher interest rates, the Department of Finance said in its fiscal monitor released in September.

The projection from Finance Canada is for public debt charges as a share of revenue to rise to 13.2 per cent in 2030-31 from 10.6 per cent in 2025-26, RBC said in its report.

Randall Bartlett, deputy chief economist, and LJ Valencia, an economist, at Desjardins Group said if bond interest rates remain at their current levels over the five-year period of the Spring Economic Update, that could cost Canadian coffers $3 billion on average starting in fiscal year 2028.

“Increases in short- and long-term interest rates from here would exacerbate the drag on the federal government’s bottom line,” they said in a report on Oct. 26.

An increase of 50 basis points to Desjardins’ forecast for long-term rates, which would lift them above four per cent, could trigger a “sustained” increase in the ratio of federal debt to gross domestic product starting in 2027.

“A permanent increase in long-term interest rates beyond that would be even more damaging,” they said.

Unlike huge debtors such as France and the United States, global investors are likely to cut Canada some budget slack on lower debt and deficits.

“This is not a free pass,” Leach said, adding the credibility and sustainability of the costs of Canada’s plans to expand and diversify the economy, which include many expensive public projects, are key to protecting the country’s triple A credit rating.

Bartlett and Valencia expect the new budget to be heavy on forecasts for spending and tax cuts and deductions, but Ottawa should grant itself some wiggle room as the shocks from “sharply higher and rising interest rates” are real.

“Budget 2026 should clarify the costing and financing of spending and revenue measures announced so far, and demonstrate the fiscal framework’s robustness to adverse shocks,” they said.

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Truckers and farmers paying record prices for diesel this fall have been asking a reasonable question: if Canada has so much oil, why can’t it make more of its own fuel?

The numbers tell a more complicated story. Canada produced a record 5.35 million barrels of crude a day in 2025, and roughly four million barrels a day went to the United States.

Canada’s 16 refineries, on the other hand, processed about 1.6 million barrels a day, running at 90 per cent of capacity, according to the Canada Energy Regulator.

That is more than enough to keep Canadians moving on the roads. The country burns roughly 830,000 barrels of gasoline a day, and the industry’s regulator says Canadian refineries produce most of the gasoline, diesel and jet fuel that Canadians consume.

“But where it comes from depends on whether you’re in B.C. or Ontario or Atlantic Canada,” said Patrick O’Rourke, managing director, institutional equity research at ATB Capital Markets. — James Rose, Financial Post

Read the full story here.

  • Bank of Canada announces its interest rate decision at 9:45 a.m. ET
  • Today’s Data: U.S. mortgage applications, advanced goods trade balance, retail and wholesale inventories.
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McLister on mortgages

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Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff and Bloomberg.

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