Opinion: But the billions of dollars of new expenditure needed to shift the political dial could make an already grave fiscal situation much worse
In nature, there are four psychological survival reactions: fight, flight, freeze and fawn.
In politics, another can be added: spend.
Chrystia Freeland, the finance minister, has named April 16 as the date of the next federal budget. Since nothing much else is working when it comes to resurrecting the fortunes of the Liberal party — polls have the Conservatives between 15 and 20 points ahead — a finance minister in survival mode can be expected to turn the spending taps to gush.
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The problem is the billions of dollars of new expenditure needed to shift the political dial could make an already grave fiscal situation much worse.
As a report issued by the Parliamentary Budget Officer on Tuesday makes clear, if the Canadian economy were a horse, it would be in danger of being boiled down for glue.
The PBO suggests that growth will remain “sluggish” — below one per cent, in part because high interest rates are restraining consumer spending and dampening the housing market.
(As an aside, the PBO said it expects lending rates to start falling in April. The Bank of Canada makes its policy decision on April 10, and the consumer price index is showing signs of returning to its two per cent target rate.)
But a cut on April 10 is unlikely to happen, since Tiff Macklem, the governor of the Bank of Canada, is likely going to want to see how much weeping gelignite Freeland pours on the fire before cutting rates. Macklem told the House of Commons finance committee that large spending increases could get in the way of beating inflation back to its target level in the timeline the bank has laid out.
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(The bank’s next policy decision is in June, another two more months of elevated rates for which Canadians can blame the finance minister.)
Who has any confidence that the Trudeau government has the situation under control?
The Liberal government has failed to live up to any of its fiscal guardrail promises in the past — the 2015 election pledge of three “modest short-term deficits” followed by a balanced budget; its next commitment was to lower the debt-to-GDP ratio every year.
The PBO report suggests that the assurance that it would keep the current deficit at or below last spring’s budget projection of $40.1 billion will also be broken. The PBO estimates the 2023/24 deficit will be $46.8 billion. The latest Fiscal Monitor from the Department of Finance suggests why the government will overshoot its own target. It revealed that while revenues for the eight months to December were up $8 billion, program expenses rose by $18.6 billion.
“Assuming no new measures are introduced,” the PBO suggests the deficit will fall gradually to $16.9 billion by 2028/29 — but that is a big assumption.
The Liberals have promised to roll out dental care to all uninsured Canadians with family income under $90,000 next year, and while it has already earmarked $13 billion over five years, that is an ambitious, expensive program.
Last week, the government took the first steps in rolling out pharmacare for Canadians, which, if the Liberals are serious about funding a national formulary, will come with a hefty price tag.
The government has also indicated that it will reach the two per cent of GDP defence spending target for NATO members — a commitment that could cost an extra $18 billion a year.
Defence Minister Bill Blair said on Monday that in his assessment, “we have got some work to do” to rebuild the Canadian Forces.
New opinion polls suggest the public is finally coming around to the idea of boosting defence spending to meet the NATO target. An Angus Reid Institute poll on Tuesday said 53 per cent of Canadians want to see more defence spending, and when respondents were told about Donald Trump’s comment on pulling military support for NATO, that number jumped to 65 per cent.
This flies in the face of the Liberals’ instincts — in fact its efforts to “refocus” government spending, saw it announce last week that defence spending will actually be cut by nearly $1 billion a year for the next three years.
Nonetheless, the government is under enormous pressure to deliver on the defence file and the apparent shift in public sentiment may spur them to respond.
The problem is that even spending that can genuinely be classed as “investment” will make a bad fiscal situation even worse.
The PBO sounded a particularly vexing alarm with its prediction that the debt servicing ratio — that is public debt charges relative to government revenues — will rise to 10.2 per cent this fiscal year. That means that $10 in every $100 of revenue will be spent on interest (compared, for example, to $6 of every $100 on defence).
Are we going bankrupt? No, Canada remains a vibrant $2-trillion economy. Is the federal government spending too much? Yes. Is our standard of living falling, relative to other rich countries? Yes.
Statistics Canada caused a stir with its latest GDP per capita numbers for the fourth quarter of 2023, which showed the fifth decline in six quarters. As Globe and Mail columnist Andrew Coyne pointed out, GDP per capita is now below where it was in the fourth quarter of 2014 (adjusted for inflation), as growth in population outpaces economic growth.
Economist Stephen Gordon argued on X, formerly Twitter, that the situation is not as bleak as some have painted it when standard of living is measured by purchasing power. But no one denies Canada has a productivity problem that is contributing to the feeling of economic malaise. Stats Canada recently said investment per worker at Canadian firms declined by 20 per cent between 2006 and 2021.
Yet, the Liberals have grown the public service by one third and increased public spending by 40 per cent since coming to power.
We should be more prepared than we are for the coming shocks caused by an aging population, climate change, AI and a more dangerous geo-political landscape.
As former Bank of Canada governor, David Dodge, told the Commons finance committee last fall, dealing with these problems will require spending a smaller share of revenues on current services.
But who has any confidence that the Trudeau government has the situation under control?
Certainly not Derek Holt, head of Capital Market Economics at Scotiabank. In a remarkable blog posting on the bank’s site this week, he said he is “deeply worried about public policy in my country.”
Bank economists are notoriously two-handed — “on the one hand…, but on the other.”
Holt proved the existence of that rare phenomenon, the one-handed economist.
“Productivity is in a tail-spin. A greater share of GDP is spent on here-today-gone-tomorrow current spending by governments and households than in a decade. Tax policy is uncompetitive. Business bashing has become common-place by people who have never spent two seconds working in private industry…
“Changes to labour laws have benefited unions, while collective bargaining exercises are driving wage growth to the moon, despite collapsing productivity. Major sections of the economy are literally being taken over by the government, with recent examples being child care, dental care and now pharmacare.
“Do we get better quality outcomes in state-run health and education sectors? Tried visiting an ER lately? ‘Nough said.”
This winter of discontent is unlikely to be relieved by more spending. Too many people feel the bill is being passed to future generations, and that the current generation is not getting value for money.
But the Liberals’ survival mode reflex is pretty much all they have left. Expect chickens in every pot, ponies in every home, rainbows and unicorns come April 16.
jivison@criffel.ca
Twitter.com/IvisonJ
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