There was so much talk that budget day would mark the federal government’s harsh return to earth that many Canadians must have been surprised that its deficit projections were not higher. This unexpected rebound is the result of a set of factors of which a major review of spending is not part, unfortunately.
During her economic statement last fall, federal Finance Minister Chrystia Freeland predicted that her government would record a deficit of $40 billion for the 2023-2024 budget year.
In March, the Parliamentary Budget Officer already said he expected this level to be exceeded and would rather flirt with 47 billion. This was before the Trudeau government embarked on a major pre-budget stripping during which it unveiled a battery of new measures affecting, among other things, defense (10.7 billion), housing (8.6 billion) and even intelligence. artificial (6.9 billion). We would ultimately learn that new spending should total 53 billion over the next five years.
No wonder, in this context, to expect that all this will darken the picture in terms of public finances. Then the time came for the Minister of Finance to unveil the new projected deficit for the financial year which has just ended: 40 billion.
OK. All right. But for next year? 39.8 billion. And the year after? 38.9 billion. Then 31 billion in 2026-2027, and still a decrease thereafter, up to 20 billion in five years.
Soaring? What flight?
This is all obviously a lot of money, but not exactly soaring deficits. In fact, we should even be talking about “the fastest fiscal recovery in the G7” since the darkest days of the COVID-19 pandemic, specifies the Ministry of Finance, so that Canada will post the deficits and net debt the weakest in the G7 as a proportion of the economy at least until 2026, and that their relative weights are expected to continue to decline well after.
It is important to note that the Trudeau government has still not given itself a plan to return to budget balance. Instead, Minister Freeland says she is respecting the “fiscal anchor point” she has set for herself, where the goal is to bring the deficit-to-gross domestic product ratio (currently at 1.4%) below the bar. of 1% from 2026-2027 and then maintain its downward trajectory, like that of the debt.
We thus hope to remain in the good graces of the rating agencies. Canada is very proud to say that it is one of only two G7 countries (along with Germany) to have an AAA rating from at least two of the three major global agencies.
This is obviously provided that another major economic crisis does not occur. But this is not the only condition for success.
If the deficits announced Tuesday are smaller than expected, it is in particular because economic growth has recently been stronger than expected, but the situation should quickly return to normal. It is also because the new spending has largely been spread over several years. But it’s also because we made changes on the income side.
The flagship measure in this regard was the increase in capital gains tax. Presented as a tax imposed on the richest, the measure should affect around 40,000 people (only 0.13% of the population), whose average income is 1.4 million, as well as 307,000 businesses. Until then, it was only half (50%) of the value of these gains that income tax applied, compared to 100% of ordinary income (individual salaries or company profits). This taxable proportion will now be increased to two-thirds (67%) from $250,000.
The measure is not revolutionary, experts point out, since the taxed proportion of capital gains was the same, or even higher (75%), from 1988 to 2000. Chrystia Freeland hopes to be able to get almost 20 billion over five years, but she could be disappointed, added our experts. Experience has shown that wealthy individuals and businesses are never short of tax optimization resources.
A missed chance to take stock
What we sought without success in the budget was the announcement of a major review of spending. The government barely said it expected to make savings of $4.2 billion over four years by reducing its public service by around 5,000 full-time positions “thanks to natural attrition.”
Last year, the Trudeau government set itself the objective of recovering $15.4 billion (including $1.3 billion from state corporations) as part of “a strategic review” of its spending. At the latest news, there were only 9 billion in savings out of almost 500 billion in spending, recently deplored the chief economist of the Desjardins Movement, Jimmy Jean, in an analysis on the subject.
Such exercises not only serve to reduce spending and deficits, but also to reprioritize spending and optimize public services, he recalled. Last year’s “strategic review” was the fifth initiative of its kind in 30 years in Ottawa. Launched by both conservative and liberal governments, these initiatives have had uneven success. The best known is perhaps that led by Jean Chrétien and his Minister of Finance Paul Martin during their pursuit of a zero deficit in the 1990s, but their successor Stephen Harper also had his own.
As exercises of this type remain relatively rare and are often seen as a desire for severe budgetary cuts, they require great determination on the part of governments and can cost them dearly politically, as Quebec Prime Minister Philippe Couillard learned to his cost. with his famous quest for “budgetary rigor”.
But it doesn’t have to take this radical or dramatic form, explained Jimmy Jean, who also drew on a recent CD Howe Institute discussion paper on the subject. In both cases, our experts gave the example of countries like Denmark and the Netherlands, where these public policy evaluation processes are carried out in a continuous, systematic, transparent and apolitical manner. Reviews that take place independently of electoral cycles or public finance crises, in which all experts, interest groups and interested citizens participate in the most pragmatic way possible and under which governments retain their power to to slice.
But hey, that’ll be for another time.