Former Bank of Canada Governor David Dodge and close associates recently threw a damper on the Trudeau government’s spending by releasing a disturbing report on the state of public finances. In short, the Liberals would be underestimating the risks of a recession and a sustained rise in interest rates in assessing their ability to meet all their commitments.
This report prepared by the Business Council of Canada recalls the other side of the Liberal government’s “expansionary fiscal policy” during the pandemic. This policy resulted in a deficit of $328 billion for the 2020-2021 fiscal year, and a debt-to-GDP ratio of 52%, while the average is around 35%. However, the situation is improving: the deficit was $3.6 billion with four months to go for fiscal year 2022-2023, compared to $73.7 billion during the same reference period in 2021- 2022.
Pandemic or not, the fact remains that the Trudeau government has never presented a balanced budget since its election in 2015. According to the fall 2022 economic statement, the federal debt should reach 1,177 billion by March 31 next. You read correctly.
State interventionism, necessary in times of crisis, did not know many limits under Justin Trudeau, as evidenced by the largesse in the granting of emergency aid.
Thus, an audit by the Auditor General, Karen Hogan, came to the conclusion that the Canada Revenue Agency (CRA) and Employment and Social Development Canada (ESDC) had demonstrated a “lack of rigor” in the recovery of overpaid benefits during COVID-19. The Auditor General concluded that the government had overpaid $4.6 billion to ineligible recipients and suggested that payments of at least $27.4 billion made to individuals or employers be examined more closely to ensure that they were indeed entitled to it. The CRA, critical of the findings, says the effort to investigate potentially overpaid employer emergency grants isn’t worth the effort. We are talking here about a sum of 15.5 billion out of the 27.4 billion cited in the audit of Mr.me Hogan.
From favoritism towards WE Charity to the open contract until 2100 with the international consulting firm McKinsey, it’s always the same recipe with the Trudeau government: indolence, carelessness, indifference towards management. prudent and responsible within a framework that still lacks transparency.
The Liberals do not seem interested in the very idea of balancing public finances. In his recent book, which also looks like a settling of accounts (Where do we go from here. A Path to Canadian Prosperitye), former finance minister Bill Morneau is critical of Justin Trudeau’s lack of economic vision and lack of interest in adopting tougher fiscal targets. The Prime Minister was more concerned with “scoring political points” during the pandemic than adopting rational and balanced aid measures, denounces his former colleague.
These public finance stories are boring and hard to follow. It is always the following generations who pay for the imprudence of the preceding ones. And then, it is always possible to encapsulate concerns about the weight of the debt by evaluating the latter according to the debt-to-GDP ratio, or even that of interest charges to income. This is where David Dodge’s report, written with the participation of Richard Dion and Robert Asselin, becomes interesting: the authors argue that the assumptions supporting the economic update are “plausible, but optimistic” given of the current economic environment.
Economic forecasting does not belong to the domain of science. In an ideal world, they are the result of the best possible reading of the environment by the best expert there is. It is possible that the authors of the report are wrong. But if they turn out to be right, the government runs a high risk of not being able to honor its commitments with the combination of one or more of the following factors: a recession, rising interest rates, interest rates that remain high due to inflationary pressures, higher cost of borrowing in the markets or permanent disruptions in supply chains. These scenarios have nothing to do with fiction.
Finance Minister Chrystia Freeland has promised to prioritize expected transfers to the provinces for health and investments in the energy transition in her next budget. It is to be hoped that it will also instil real reflexes of fiscal prudence within this government of debonair expansionism.