Justin Trudeau’s government made every effort on Wednesday to convince Canadians the country can afford a deficit that will soar to 16% of economic output this year. Its actions suggest there’s some worry.

In the same budget update that forecast a C$343 billion ($254 billion) deficit, Finance Minister Bill Morneau announced a significant shift in strategy toward issuing longer-dated bonds -- a tacit acknowledgment the rising debt levels are making the nation’s finances more vulnerable to any rise in interest rates. The idea is to lock in as debt at current borrowing costs for as long as possible, to ensure public debt charges don’t surge in the future.

With federal debt surpassing C$1 trillion for the first time ever, the risk is real.

Rates are at historic lows today because of the global recession, but a recovery will drive them higher. If interest costs on public debt simply return to last year’s levels -- when they equaled 3.4% of debt -- Ottawa’s interest payments would nearly double, according to Bloomberg calculations.

That’s not taking into account the likelihood that large deficits will continue for years.

“The complacency is incredible since many pundits say the sustainability is solid because of ultra-low interest rates,” said David Rosenberg, founder of Rosenberg Research and Associates and former chief North American economist at Merrill Lynch & Co.

“The problem with that is the low interest rate regime reflects a future of very weak nominal growth, which in turn points to ever-weaker revenue generation.”

https://ca.yahoo.com/finance/news/trudeau-deficit-swells-16-output-181047209.html