Business
Federal government poised to pile on more spending and debt
From the Fraser Institute
Next week, the Trudeau government will release its fall fiscal update, which, considering the sorry state of federal finances, should demonstrate a newfound approach to spending and borrowing. But don’t hold your breath.
Although the Trudeau government describes itself as “fiscally responsible,” in reality it has a track record of unrestrained spending and large budget deficits. And it’s overseen the five highest years (2018 to 2022) of per-person program spending (adjusted for inflation) in Canadian history. Even excluding COVID-related spending, 2020 and 2021 remain the two highest years of per-person spending on record.
The Trudeau government has also run deficits every year since it took office in 2015—according to forecasts, this year’s deficit will eclipse $40 billion even though COVID is in the rearview mirror. Consequently, federal debt will have increased nearly $900 billion since 2014/15, up to $1.9 trillion for 2023/24.
While the prime minister and Finance Minister Chrystia Freeland often downplay the level of debt accumulation by noting that Canada has the lowest net debt-to-GDP ratio among the G7 countries (Germany, Italy, Japan, France, the United Kingdom and the United States), this is misleading.
Net debt is calculated as total (gross) debt minus all financial assets, with the implicit assumption that those assets could be used to offset debt. However, the Canada and Quebec Pension Plans (CPP and QPP) are included in the financial assets used to calculate net debt in Canada. But because CPP/QPP assets are needed for existing and future retirees, in reality they can’t be used to offset government debt.
Therefore, a better measure is gross debt, which measures all liabilities that require future payment of interest and/or principal by the debtor to the creditor. Compared to 29 other advanced economies, including the G7 countries, Canada’s gross debt as a share of the economy ranks 20th—meaning Canada is among the most indebted countries.
Clearly, the Trudeau government has been anything but fiscally responsible. And the current levels of spending and borrowing impose real costs on Canadians.
For example, since 2014/15 federal government debt interest costs have nearly doubled—reaching an estimated $43.9 billion, or 9.6 per cent of total revenues, for 2023/24. This means roughly one in every 10 dollars Ottawa collects from Canadian taxpayers this year will go towards debt interest costs, rather than government services or tax relief.
In light of these fiscal realities, if the Trudeau government wants to move anywhere close to a balanced budget in the foreseeable future, it must take meaningful steps in the upcoming fall fiscal update to restrain spending growth.
Unfortunately, this is unlikely to happen.
In a recent report, the Parliamentary Budget Officer (PBO) estimated that, due to spending increases, the federal government will run a deficit of $46.5 billion for 2023/24—$6.4 billion more than the government’s budget projections in March.
The government will also likely include new spending in the upcoming fiscal update meant to address housing and affordability. And will likely soon table legislation on national pharmacare, which the PBO estimates will cost $11.2 billion in 2024/25 alone.
Finally, not only does this unprecedented level of spending rack up mountains of debt, according to Bank of Canada Governor Tiff Macklem, “government spending is starting to get in the way of getting inflation back to target.” In other words, more spending by the federal government to address affordability concerns could actually worsen the problem by keeping inflation (and interest rates) higher than would otherwise be the case, eroding the purchasing power of Canadians.
While Ottawa’s fiscal situation demands a fiscally responsible fall fiscal update, it’s likely we’ll see much of the same next week from the Trudeau government—more spending and more borrowing.
Authors:
From the Fraser Institute
By Tegan Hill
According to this week’s fiscal update, amid falling oil prices, the Alberta government will run a projected $6.4 billion budget deficit in 2025/26—higher than the $5.2 billion deficit projected earlier this year and a massive swing from the $8.3 billion surplus recorded in 2024/25.
Overall, that’s a $14.8 billion deterioration in Alberta’s budgetary balance year over year. Resource revenue, including oil and gas royalties, comprises 44.5 per cent of that decline, falling by a projected $6.6 billion.
Albertans shouldn’t be surprised—the good times never last forever. It’s all part of the boom-and-bust cycle where the Alberta government enjoys budget surpluses when resource revenue is high, but inevitably falls back into deficits when resource revenue declines. Indeed, if resource revenue was at the same level as last year, Alberta’s budget would be balanced.
Instead, the Alberta government will return to a period of debt accumulation with projected net debt (total debt minus financial assets) reaching $42.0 billion this fiscal year. That comes with real costs for Albertans in the form of high debt interest payments ($3.0 billion) and potentially higher taxes in the future. That’s why Albertans need a new path forward. The key? Saving during good times to prepare for the bad.
The Smith government has made some strides in this direction by saving a share of budget surpluses, recorded over the last few years, in the Heritage Fund (Alberta’s long-term savings fund). But long-term savings is different than a designated rainy-day account to deal with short-term volatility.
Here’s how it’d work. The provincial government should determine a stable amount of resource revenue to be included in the budget annually. Any resource revenue above that amount would be automatically deposited in the rainy-day account to be withdrawn to support the budget (i.e. maintain that stable amount) in years when resource revenue falls below that set amount.
It wouldn’t be Alberta’s first rainy-day account. Back in 2003, the province established the Alberta Sustainability Fund (ASF), which was intended to operate this way. Unfortunately, it was based in statutory law, which meant the Alberta government could unilaterally change the rules governing the fund. Consequently, by 2007 nearly all resource revenue was used for annual spending. The rainy-day account was eventually drained and eliminated entirely in 2013. This time, the government should make the fund’s rules constitutional, which would make them much more difficult to change or ignore in the future.
According to this week’s fiscal update, the Alberta government’s resource revenue rollercoaster has turned from boom to bust. A rainy-day account would improve predictability and stability in the future by mitigating the impact of volatile resource revenue on the budget.
Tegan Hill
Director, Alberta Policy, Fraser Institute
The Canadian Taxpayers Federation is criticizing the Memorandum of Understanding between the federal and Alberta governments for including higher carbon taxes.
“Hidden carbon taxes will make it harder for Canadian businesses to compete and will push Canadian entrepreneurs to shift production south of the border,” said Franco Terrazzano, CTF Federal Director. “Politicians should not be forcing carbon taxes on Canadians with the hope that maybe one day we will get a major project built.
“Politicians should be scrapping all carbon taxes.”
The federal and Alberta governments released a memorandum of understanding. It includes an agreement that the industrial carbon tax “will ramp up to a minimum effective credit price of $130/tonne.”
“It means more than a six times increase in the industrial price on carbon,” Prime Minister Mark Carney said while speaking to the press today.
Carney previously said that by “changing the carbon tax … We are making the large companies pay for everybody.”
A Leger poll shows 70 per cent of Canadians believe businesses pass most or some of the cost of the industrial carbon tax on to consumers. Meanwhile, just nine per cent believe businesses pay most of the cost.
“It doesn’t matter what politicians label their carbon taxes, all carbon taxes make life more expensive and don’t work,” Terrazzano said. “Carbon taxes on refineries make gas more expensive, carbon taxes on utilities make home heating more expensive and carbon taxes on fertilizer plants increase costs for farmers and that makes groceries more expensive.
“The hidden carbon tax on business is the worst of all worlds: Higher prices and fewer Canadian jobs.”
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