Prime Minister Mark Carney tried to address concerns on the campaign trail by promising to balance the operating budget within three years.PATRICK DOYLE/The Canadian Press
Jake Fuss and Grady Munro are economists at the Fraser Institute.
While Prime Minister Mark Carney has promised to fix the rotten fiscal situation he inherited, based on his recent commitments, Canadians shouldn’t hold their breath.
During April’s federal election campaign, the Liberal platform promised a budget deficit of $62.3-billion this year – roughly $20-billion larger than what the Trudeau government projected a few months earlier. The platform included billions in new spending on items such as infrastructure, CBC programming and enhanced benefits for seniors, in addition to planned revenue losses from tax changes on capital gains, personal income and the GST for first-time homebuyers.
Clearly, according to Mr. Carney’s plan, it was more of the same Trudeau-era approach: massive spending, large deficits and more debt. Then Canada entered trade negotiations with the Trump administration.
In response to pressure from President Donald Trump, Mr. Carney increased defence spending to 2 per cent of GDP (the target for NATO allies) this year and 5 per cent by 2035. And he scrapped the digital services tax that had drawn the ire of many south of the border.
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Regardless of the pros or cons of these moves, on aggregate they mean higher spending and more borrowing, including for the additional $9.3-billion in defence spending in 2025/26. Ottawa will also lose an estimated $1.2-billion in digital services tax revenue this year. Add everything up and the deficit for this year will likely eclipse $70-billion.
For context, that’s higher than eight of the last 10 deficits the Trudeau government ran (only exceeded by the two COVID-19 years). To his credit, Mr. Carney has recognized the budget crunch and asked his cabinet to find “ambitious savings” across their departments starting next year. A comprehensive spending review is long overdue and represents a step in the right direction.
However, the government is excluding more than half of all program spending, including all transfers to individuals (for example, seniors’ benefits) and the provinces, as well as military spending. And, according to the Liberal platform, the government already planned to save $28-billion over the next three years by amalgamating service delivery, consolidating programs, using artificial intelligence and reducing the use of external consultants. It’s unclear if these projected savings will count toward the review or if the government will instead make additional deep cuts to the budget.
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On the campaign trail, Mr. Carney tried to address concerns by promising to balance the operating budget – spending on government salaries and cash transfers to provinces and individuals – within three years. But Canadians should be skeptical of that promise and understand that his plan involves borrowing substantial sums of money in a separate capital budget, which includes spending on “anything that builds an asset.”
Promising to balance the operating budget while continuing to borrow elsewhere is like throwing dirt in one hole while digging a crater in another area of the garden. It’ll be a tough hole to climb out of, and Canadians will suffer the consequences. Rising debt usually leads to slower economic growth, higher debt interest costs that leave less money for other programs and higher taxes for future generations.
Mr. Carney inherited a mess from Justin Trudeau, but his fiscal plan appears poised to make the problem much worse. The government won’t table its first official budget until the fall, but Mr. Carney’s election platform charted combined deficits of $224.8-billion over the next four years (much higher, incidentally, than projections by the Trudeau government – the highest-spending government in Canadian history). Now, even those huge numbers seem like a pipe dream.