Economy
Federal government’s fiscal plan raises red flags
From the Fraser Institute
By Jason Clemens, Jake Fuss and Grady Munro
The Trudeau government recently released its fiscal update, which provides revised estimates of spending, taxing and borrowing. A careful examination of the update raises several red flags about the state of Canada’s national finances.
First, some analyses raised concerns about the state of federal borrowing, which are well founded. While the government downplays the level of potential borrowing over the six years covered in the fiscal update, the projected deficit—that is, the amount of spending in a specific year in excess of the amount of revenues—will reach $40.0 billion this year (2023-24) and $38.4 billion next year. However, the estimate for next year does not include the national pharmacare plan that the Trudeau government has agreed to as part of its governing agreement with the NDP.
The Parliamentary Budget Officer (PBO) estimated that a national pharmacare plan modelled on the Quebec system would cost $11.2 billion in 2024-25 (the provinces would likely cover some of this). The 2019 report of the Advisory Council on the Implementation of National Pharmacare, better known as the Hoskins Commission, estimated that a national pharmacare program would cost $15.3 billion in 2027.
Consequently, if the government introduces national pharmacare next year, without any offsetting reduction in other spending and/or meaningful tax increases, the deficit for 2024-25 would reach $49.6 billion, not the reported $38.4 billion. The higher borrowing needed to finance pharmacare continues each and every year, meaning that the overall level of federal debt would also increase.
A second red flag, which the fiscal update ignored, relates to Canada meeting its international commitment for defence spending. Canada is a party to the NATO agreement calling on member countries to spend 2.0 per cent of GDP on national defence. In 2022, Canada spent just 1.3 per cent of GDP on defence. According to the PBO, for the federal government to meet its NATO spending obligations next year (2024-25), it must spend an additional $14.5 billion. That means annual borrowing could be as high as $64.1 billion if both additional defence and pharmacare spending were financed entirely by new borrowing.
And there are legitimate reasons to believe the government would not raise taxes to finance a new pharmacare program. According to polling data in 2022, 79 per cent of survey respondents supported a new national pharmacare program—but support plummeted to just 40 per cent when the new hypothetical program was financed by higher taxes, specifically a higher GST.
That brings us to the third red flag. The total national debt will reach a projected $2.1 trillion next year (excluding the additional potential spending and borrowing noted on pharmacare and defence) and the interest costs on that debt are expected to reach $52.4 billion. For reference, the total national debt stood at $1.1 trillion in 2015-16 when the Trudeau Liberals took office.
By 2028-29, the last year included in the fiscal update, the federal government expects interest costs to reach $60.7 billion. That’s only slightly less than total planned health-care spending by Ottawa for the same year ($62.9 billion). And this is actually a conservative estimate since it excludes potential higher borrowing for programs such as pharmacare and thus higher debt levels. It also ignores any possibility of a downgrading in the ratings for Canada’s debt, which would result in higher interest costs. And it ignores the risk of an economic slowdown or recession that would further increase borrowing and ultimately debt interest costs.
While the federal government, particularly the prime minister and his finance minister, continue to describe their stewardship of federal finances as prudent and responsible, close examination of their fiscal update reveals that federal finances may soon deteriorate from their already worrying position.
Authors:
Business
Most Canadians say retaliatory tariffs on American goods contribute to raising the price of essential goods at home
- 77 per cent say Canada’s tariffs on U.S. products increase the price of consumer goods
- 72 per cent say that their current tax bill hurts their standard of living
A new MEI-Ipsos poll published this morning reveals a clear disconnect between Ottawa’s high-tax, high-spending approach and Canadians’ level of satisfaction.
“Canadians are not on board with Ottawa’s fiscal path,” says Samantha Dagres, communications manager at the MEI. “From housing to trade policy, Canadians feel they’re being squeezed by a government that is increasingly an impediment to their standard of living.”
More than half of Canadians (54 per cent) say Ottawa is spending too much, while only six per cent think it is spending too little.
A majority (54 per cent) also do not believe federal dollars are being effectively allocated to address Canada’s most important issues, and a similar proportion (55 per cent) are dissatisfied with the transparency and accountability in the government’s spending practices.
As for their own tax bills, Canadians are equally skeptical. Two-thirds (67 per cent) say they pay too much income tax, and about half say they do not receive good value in return.
Provincial governments fared even worse. A majority of Canadians say they receive poor value for the taxes they pay provincially. In Quebec, nearly two-thirds (64 per cent) of respondents say they are not getting their money’s worth from the provincial government.
Not coincidentally, Quebecers face the highest marginal tax rates in North America.
On the question of Canada’s response to the U.S. trade dispute, nearly eight in 10 Canadians (77 per cent) agree that Ottawa’s retaliatory tariffs on American products are driving up the cost of everyday goods.
“Canadians understand that tariffs are just another form of taxation, and that they are the ones footing the bill for any political posturing,” adds Ms. Dagres. “Ottawa should favour unilateral tariff reduction and increased trade with other nations, as opposed to retaliatory tariffs that heap more costs onto Canadian consumers and businesses.”
On the issue of housing, 74 per cent of respondents believe that taxes on new construction contribute directly to unaffordability.
All of this dissatisfaction culminates in 72 per cent of Canadians saying their overall tax burden is reducing their standard of living.
“Taxpayers are not just ATMs for government – and if they are going to pay such exorbitant taxes, you’d think the least they could expect is good service in return,” says Ms. Dagres. “Canadians are increasingly distrustful of a government that believes every problem can be solved with higher taxes.”
A sample of 1,020 Canadians 18 years of age and older was polled between June 17 and 23, 2025. The results are accurate to within ± 3.8 percentage points, 19 times out of 20.
The results of the MEI-Ipsos poll are available here.
* * *
The MEI is an independent public policy think tank with offices in Montreal, Ottawa, and Calgary. Through its publications, media appearances, and advisory services to policymakers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.
Quick Hit:
President Trump on Thursday confirmed a sweeping new 35% tariff on Canadian imports starting August 1, citing Canada’s failure to curb fentanyl trafficking and retaliatory trade actions.
Key Details:
- In a letter to Canadian Prime Minister Mark Carney, Trump said the new 35% levy is in response to Canada’s “financial retaliation” and its inability to stop fentanyl from reaching the U.S.
- Trump emphasized that Canadian businesses that relocate manufacturing to the U.S. will be exempt and promised expedited approvals for such moves.
- The administration has already notified 23 countries of impending tariffs following the expiration of a 90-day negotiation window under Trump’s “Liberation Day” trade policy.
Diving Deeper:
President Trump escalated his tariff strategy on Thursday, formally announcing a 35% duty on all Canadian imports effective August 1. The move follows what Trump described as a breakdown in trade cooperation and a failure by Canada to address its role in the U.S. fentanyl crisis.
“It is a Great Honor for me to send you this letter in that it demonstrates the strength and commitment of our Trading Relationship,” Trump wrote to Prime Minister Mark Carney. He added that the tariff response comes after Canada “financially retaliated” against the U.S. rather than working to resolve the flow of fentanyl across the northern border.
Trump’s letter made clear the tariff will apply broadly, separate from any existing sector-specific levies, and included a warning that “goods transshipped to evade this higher Tariff will be subject to that higher Tariff.” The president also hinted that further retaliation from Canada could push rates even higher.
However, Trump left the door open for possible revisions. “If Canada works with me to stop the flow of Fentanyl, we will, perhaps, consider an adjustment to this letter,” he said, adding that tariffs “may be modified, upward or downward, depending on our relationship.”
Canadian companies that move operations to the U.S. would be exempt, Trump said, noting his administration “will do everything possible to get approvals quickly, professionally, and routinely — In other words, in a matter of weeks.”
The U.S. traded over $762 billion in goods with Canada in 2024, with a trade deficit of $63.3 billion, a figure Trump called a “major threat” to both the economy and national security.
Speaking with NBC News on Thursday, Trump suggested even broader tariff hikes are coming, floating the idea of a 15% or 20% blanket rate on all imports. “We’re just going to say all of the remaining countries are going to pay,” he told Meet the Press moderator Kristen Welker, adding that “the tariffs have been very well-received” and noting that the stock market had hit new highs that day.
The Canadian announcement is part of a broader global tariff rollout. In recent days, Trump has notified at least 23 countries of new levies and revealed a separate 50% tariff on copper imports.
“Not everybody has to get a letter,” Trump said when asked if other leaders would be formally notified. “You know that. We’re just setting our tariffs.”
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