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:

Jason Clemens

Executive Vice President, Fraser Institute

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Grady Munro

Junior Policy Analyst, Fraser Institute

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Canada Caves: Carney ditches digital services tax after criticism from Trump

Published on June 30, 2025

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From The Center Square

By Brett Rowland

Canada caved to President Donald Trump demands by pulling its digital services tax hours before it was to go into effect on Monday.

Trump said Friday that he was ending all trade talks with Canada over the digital services tax, which he called a direct attack on the U.S. and American tech firms. The DST required foreign and domestic businesses to pay taxes on some revenue earned from engaging with online users in Canada.

“Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately,” the president said. “We will let Canada know the Tariff that they will be paying to do business with the United States of America within the next seven day period.”

By Sunday, Canada relented in an effort to resume trade talks with the U.S., it’s largest trading partner.

“To support those negotiations, the Minister of Finance and National Revenue, the Honourable François-Philippe Champagne, announced today that Canada would rescind the Digital Services Tax (DST) in anticipation of a mutually beneficial comprehensive trade arrangement with the United States,” according to a statement from Canada’s Department of Finance.

Canada’s Department of Finance said that Prime Minister Mark Carney and Trump agreed to resume negotiations, aiming to reach a deal by July 21.

U.S. Commerce Secretary Howard Lutnick said Monday that the digital services tax would hurt the U.S.

“Thank you Canada for removing your Digital Services Tax which was intended to stifle American innovation and would have been a deal breaker for any trade deal with America,” he wrote on X.

Earlier this month, the two nations seemed close to striking a deal.

Trump said he and Carney had different concepts for trade between the two neighboring countries during a meeting at the G7 Summit in Kananaskis, in the Canadian Rockies.

Asked what was holding up a trade deal between the two nations at that time, Trump said they had different concepts for what that would look like.

“It’s not so much holding up, I think we have different concepts, I have a tariff concept, Mark has a different concept, which is something that some people like, but we’re going to see if we can get to the bottom of it today.”

Shortly after taking office in January, Trump hit Canada and Mexico with 25% tariffs for allowing fentanyl and migrants to cross their borders into the U.S. Trump later applied those 25% tariffs only to goods that fall outside the free-trade agreement between the three nations, called the United States-Mexico-Canada Agreement.

Trump put a 10% tariff on non-USMCA compliant potash and energy products. A 50% tariff on aluminum and steel imports from all countries into the U.S. has been in effect since June 4. Trump also put a 25% tariff on all cars and trucks not built in the U.S.

Economists, businesses and some publicly traded companies have warned that tariffs could raise prices on a wide range of consumer products.

Trump has said he wants to use tariffs to restore manufacturing jobs lost to lower-wage countries in decades past, shift the tax burden away from U.S. families, and pay down the national debt.

A tariff is a tax on imported goods paid by the person or company that imports them. The importer can absorb the cost of the tariffs or try to pass the cost on to consumers through higher prices.

Trump’s tariffs give U.S.-produced goods a price advantage over imported goods, generating revenue for the federal government.

Brett Rowland

Investigative Reporter

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Trump on Canada tariff deadline: ‘We can do whatever we want’

Published on June 29, 2025

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From The Center Square

By Brett Rowland

President Donald Trump appears unconcerned about an upcoming tariff deal deadline after abruptly ending all trade talks with Canada as his bid to overhaul world trade continues.

Trump is nearing the end of a self-imposed 90-day deadline to strike deals with nearly every U.S. trading partner as he works to reorder global trade by giving America a competitive advantage through tariffs on foreign goods.

Trump now says that the deadline could be extended past July 9 or even accelerated.

“We can do whatever we want. We could extend it, we could make it shorter. I’d like to make it shorter,” Trump said Friday at the Oval Office. “I’d like to just send letters out to everyone ‘Congratulations, you’re paying 25%.'”

On April 2, Trump announced reciprocal tariffs on nearly every nation that trades with the U.S. Seven days later, he paused those higher tariff rates for 90 days to give his trade team time to cut deals with key trading partners. That 90-day deadline ends July 9 and thus far Trump has brought home two deals: A limited trade pact with the United Kingdom and a trade truce with China.

Commerce Secretary Howard Lutnick told Bloomberg that new deals are on the way, and those could serve as models for others.

“We’re going to do top 10 deals, put them in the right category, and then these other countries will fit behind,” Lutnick said.

He said the U.S. was “close to the finish line” with India. Lutnick also said he had made an offer to the European Union.

Trump’s decision to suspend trade talks with Canada with just days left before the deadline underscored the flexibility of the president’s trade deadline.

“These are very complex negotiations and we are going to continue them in the best interests of Canadians,” Candian Prime Minister Mark Carney said Friday while leaving his office, according to local reports.

Canada has invariably been one of the top two trading partners for the United States for years. In 2024, Canada was the top destination for U.S. exports and the third-largest source of U.S. imports. On the other side, Canada exported 75% of its goods to the United States and imported almost half of its goods from the United States.

U.S. total goods trade with Canada was an estimated $762.1 billion in 2024, according to the Office of the U.S. Trade Representative. U.S. goods exports to Canada in 2024 were $349.4 billion. U.S. imports from Canada in 2024 totaled $412.7 billion. The U.S. goods trade deficit with Canada was $63.3 billion in 2024.

Services trade with Canada, exports and imports, totaled an estimated $140.3 billion in 2023. Services exports were $86.0 billion, and services imports were $54.3 billion. The U.S. services trade surplus with Canada was $31.7 billion in 2023, according to the Office of the U.S. Trade Representative.

Trump put a stop to the talks on Friday.

“We have just been informed that Canada, a very difficult Country to TRADE with, including the fact that they have charged our Farmers as much as 400% Tariffs, for years, on Dairy Products, has just announced that they are putting a Digital Services Tax on our American Technology Companies, which is a direct and blatant attack on our Country,” Trump wrote on Truth Social.

Trump said the digital services tax was a copy of a European Union proposal.

Earlier this month, the two nations seemed close to striking a deal.

Trump said he and Canada Prime Minister Mark Carney had different trade concepts between the two neighboring countries during a meeting at the G7 Summit in Kananaskis, in the Canadian Rockies.

Asked what was holding up a trade deal between the two nations at that time, Trump said they had different concepts for what that would look like.

The tariffs have frustrated Canadian leaders and residents. Tensions between the two neighboring countries have been high. And cities on both sides of the U.S.-Canada border have been affected.

Trump has repeatedly suggested that Canada join the U.S. as its 51st state. He previously called former Canadian Prime Minister Justin Trudeau “governor” regularly.