In his speech to the House of Commons on Tuesday, Finance Minister Fran\u00e7ois-Philippe Champagne tried to position his budget as a successor to the seminal 1995 effort of Paul Martin.<\/p>\n
\u201cI am reminded of the words of a previous Finance Minister, when in 1995, he presented his budget,\u201d he said. \u201c\u2018Our very way of life as Canadians is being tested and there are times in the progress of people when fundamental choices must be made, and a new course charted. For Canada, this is one of those times.\u2019 And Mr. Speaker, I would say that today we are also facing a unique moment.\u201d<\/p>\n
Last week\u2019s fiscal plan does indeed read like a Paul Martin budget: that of 1994, which played so badly at home and on international markets that it propelled the Liberals to a much more ambitious attempt the next year. <\/p>\n
Open this photo in gallery:<\/a><\/p>\n Wearing new boots, former Finance Minister Paul Martin shakes hands with then-Prime Minister Jean Chr\u00e9tien ahead of delivering the 1994 federal budget.FRED CHARTRAND\/The Canadian Press<\/p>\n The Chr\u00e9tien government\u2019s original plan of reducing the deficit<\/a> below 3 per cent of gross domestic product by fiscal 1997 through modest cost-cutting didn\u2019t last long. <\/p>\n The Mexican peso crisis in the fall of 1994, a scathing Wall Street Journal editorial and, more substantively, a February, 1995 warning about Canada\u2019s credit rating from Moody\u2019s all set the stage for a far more ambitious second budget from Mr. Martin. Program spending dropped, whole government departments transformed and transfers to the provinces were cut. <\/p>\n By 1997, the deficit had fallen to just 1 per cent of GDP. The next year, Ottawa would record its first budget surplus in 28 years.<\/p>\n Mr. Champagne may be trying to channel the mojo of 1995, but his own budget more resembles the milquetoast effort of 1994. Once again, the Liberals are promising to reduce the deficit-to-GDP ratio. Once again, their cost-reduction plan falls flat.<\/p>\n And once again, ratings agencies are similarly unenthused. On Thursday, Fitch Ratings flagged its concerns<\/a> about Ottawa\u2019s \u201cpersistent fiscal expansion and a rising debt burden,\u201d which could put pressure on Canada\u2019s credit rating in the medium term.<\/p>\n The warning could scarcely be clearer: The Liberals will need to do more to shore up Ottawa\u2019s fiscal position. But there is a bigger concern than the balance-sheet worries of ratings agencies \u2013 the generational inequity at the heart of last week\u2019s budget. Rising debt costs and the soaring cost of payments to seniors will increasingly squeeze the federal budget.<\/p>\n Mr. Champagne\u2019s first budget failed to tackle that problem. If he truly does want to reenact 1995, he will have to come up with a much more ambitious plan. <\/p>\n The two towering costs of the budget<\/p>\n The 2025 budget failed to rein in two of the fastest growing line items in the budget: payments to senior citizens (which Ottawa calls elderly benefits) and the cost of the national debt. <\/p>\n As the chart below shows, interest payments are projected to grow at a compounded annual average rate of 8.2 per cent through to fiscal 2030. Elderly benefits \u2013 the Old Age Security and Guaranteed Income Supplement programs \u2013 are also growing fast, at 5.9 per cent.<\/p>\n<\/p>\n Both will grow far faster than outlays for young families, such as the Canada Child Benefit, and national child-care subsidies.<\/p>\n Part of that growth is beyond Ottawa\u2019s control. As Canada\u2019s population ages, the cost of elderly benefits swells, with inflation indexing adding to the cost. Annual payments to senior citizens will jump by $21.2-billion between this year and fiscal 2030 \u2013 accounting for 80 cents out of every new dollar that Ottawa spends on transfers to individuals over that time span.<\/p>\n Another year, deeper in debt<\/p>\n The rise in debt servicing costs is even more stunning. As this second chart shows, interest costs are slated to jump to $76.1-billion in fiscal 2030 from $53.4-billion in fiscal 2025, an increase of $22.7-billion. <\/p>\n<\/p>\n For context, that increase is nearly as much as the entire amount Ottawa spent, $24.4-billion, servicing the national debt in fiscal 2020. But the rates that Ottawa expects to pay (and the sheer size of the debt) means those costs are escalating year after year.<\/p>\n The Liberals seemed to have recognized that problem, at least when campaigning for reelection this spring. The party\u2019s platform contained a commitment to decrease the ratio of debt to GDP, in line with the fiscal anchor laid out in the 2024 budget and the December fiscal update.<\/p>\n<\/p>\n That promise has vanished, without apology or explanation. Instead, as this third chart shows, the debt burden is now predicted to rise through to the end of the decade, a markedly worse outlook than previous projections.<\/p>\n The government\u2019s long-term projections show the debt to GDP ratio barely shifting downward by mid-century. And the size of today\u2019s debt leaves Ottawa in a vulnerable position should interest rates start to rise: a sustained increase of one percentage point would swell the deficit by $4.9-billion in year 1 and $7.9-billion by year 4. <\/p>\n Fairer benefits for seniorsOpen this photo in gallery:<\/a><\/p>\n The 2025 budget failed to rein in two of the fastest growing line items in the budget: payments to senior citizens and the cost of the national debt.Adrian Wyld\/The Canadian Press<\/p>\n No responsible fiscal plan can allow such shaky finances to be passed on to younger Canadians. And no responsible fiscal plan is possible without reining in the costs of Old Age Security payments.<\/p>\n Right now, OAS payments are sent to seniors whose retirement years are amply secure. A couple with an $181,000 household income would together receive annual payments of nearly $18,000<\/a>, without benefits being clawed back. Taxing poorer, younger Canadians to cut cheques for wealthy retirees is nonsensical at the best of times, and incomprehensible when debt costs are surging.<\/p>\n University of British Columbia professor Paul Kershaw calculates that Ottawa could save $7-billion in the current fiscal year, rising to $9-billion by fiscal 2029, in part by starting to claw back benefits once a senior\u2019s household income hits $100,000. He recommends spending $2.5-billion on those savings to ensure that the poorest seniors don\u2019t fall below the official poverty line. On that basis, Ottawa could book savings of $4.5-billion today, rising to $6.5-billion by 2029.<\/p>\n Mr. Martin floated a similar proposal in 1996, but withdrew his plans under public pressure. Today\u2019s Liberals should dust off his blueprint. <\/p>\n Cuts that bite <\/p>\n Reform of the OAS would be a step toward fiscal stability, but not enough on its own. A crucial next move would be a far-ranging review of program spending, similar to Mr. Martin\u2019s 1995 effort.<\/p>\n Of course, the Liberals claimed last week that they were doing just that, with their \u201ccomprehensive expenditure review.\u201d But much of the ballyhooed savings are aspirational \u2013 there are many organization structures to be optimized \u2013 and some are far removed from any rational conception of restructuring.<\/p>\n Open this photo in gallery:<\/a><\/p>\n In rolling back the size of the public service, the Liberals propose returning to 2022 staffing levels, shedding about 40,000 positions over five years.Adrian Wyld\/The Canadian Press<\/p>\n The two biggest single savings outlined in the Liberals\u2019 review are from reducing payments to RCMP and military retirees for medical marijuana, and changes to how government pensions are indexed. Both will result in substantial cash savings, over many decades. <\/p>\n But the Liberals book the current value of those future savings in this budget: $10.2-billion, representing nearly a quarter of the $44.2-billion in forecast savings from the review. Such a measure is in line with Ottawa\u2019s budget rules. But that the two biggest sources of savings are accounting tweaks underscores how little the Liberals have done to reshape and rethink the role of government.<\/p>\n Don Drummond, a senior Finance official during Mr. Martin\u2019s tenure, says a truly bold budget would need to cut much deeper. His calculations indicate that the Liberals would need to cut an additional $7.2-billion in annual costs, just to return program spending relative to the economy to 2020 levels.<\/p>\n A chunk of those savings can be found in further rolling back the size of the public service. Mr. Champagne\u2019s budget gives a nod in that direction, but the Liberals propose to return only to 2022 levels, shedding about 40,000 positions from the employment peak of fiscal 2024 through to 2030. That might sound impressive, but the Liberals had added 110,000 civil servants by 2024.<\/p>\n A thoughtful and ambitious program review will inevitably result in job losses (and additional savings). A realistic goal: return the size of the public service to 2019 levels, of around 287,000 workers, baking in a modest expansion of government, but finally ending the bureaucratic bloat of the last half-decade.<\/p>\n Finally, tens of billions of dollars of savings lurk in subsidies to business. A hard-eyed review of those programs should start from the default position that none are needed; only those that can be shown to create more wealth than their cost will destroy should be kept.<\/p>\n Open this photo in gallery:<\/a><\/p>\n Since its release on Tuesday, Prime Minister Mark Carney has defended the federal budget, saying his government made strategic choices that are designed to boost economic growth.Spencer Colby\/The Canadian Press<\/p>\n Mr. Carney, keep your tax promise<\/p>\n Mr. Champagne ducked the question of a comprehensive tax review \u2013 promised in the Liberal platform \u2013 when questioned by reporters on budget day. Prime Minister Mark Carney should clear the air, and launch that review immediately in order to make those changes in the next budget.<\/p>\n The basic problems are obvious, if to date intractable. An uncompetitive investment tax structure, marginal personal income rates that are too high and an overdependence on revenue from income<\/a>.<\/p>\n The Liberals did brag about the decrease in effective marginal tax rates for corporations in last week\u2019s budget. But those numbers rest on a series of carefully sculpted tax breaks \u2013 just one more way that the Liberals suppose that they are better able than the private sector to determine where investments should be made. The comprehensive tax review should end that meddling and simply reduce taxation across the board.<\/p>\n All of that adds up to an ambitious agenda \u2013 much more ambitious than what the Liberals touted this month. To his lasting credit, Mr. Martin realized that his initial fiscal plan, if left unchanged, would put Canada on a perilous path.<\/p>\n That is the real lesson from 1995 for Mr. Champagne, should he choose to learn it.<\/p>\n Editor\u2019s note: An earlier version of this editorial contained an incorrect figure for the OAS clawback threshold.<\/p>\n THE SUNDAY EDITORIAL <\/p>\n The Carney Liberals arrive at a fiscal fork in the road<\/a><\/p>\n