Federal Finance Minister Chrystia Freeland did her best to “sell” the economic update to Canadian voters — because they are the ones the Trudeau government is addressing with this cautiously optimistic statement, which relies on accessibility to housing and the lower cost of living to appeal. Should we be satisfied that Canada displays, at 42.7%, the lowest debt to gross domestic product (GDP) ratio among the G7 countries? Is this still the measure on which we should base our assessment of the government in terms of public financial management?
These difficult questions will not disappear from public debate, quite the contrary. They even risk sticking to the government like a bad cold, courtesy of the pugnacious leader of the Conservative Party of Canada (PCC), Pierre Poilievre, who will not miss an opportunity to say that Justin Trudeau’s Canada “is broken” until the next elections.
This Canada may not yet be broken, but it is beginning to display worrying distortions in the management of public finances. Since his first election in 2015, Justin Trudeau has not balanced any of his budgets, whether the economic situation is favorable to him or not. We now view a spending slowdown, like the one announced on Tuesday, as progress, which is saying something.
Of course, the difficult pandemic years required the presence of a Keynesian-type state to support the struggling economy and households. Critics, however, will say that the support measures for individuals, students and businesses have remained in place a little too long, helping in part to fuel the cycle of inflation. And some programs were managed accordingly. The Auditor General of Canada has estimated the emergency overpayments at $4.6 billion, but she estimates that other payments of at least $27 billion should be examined more closely. The Canada Revenue Agency, where nearly 120 civil servants were fired for having received the Canadian Emergency Response Benefit (CERB) without being entitled to it (!), is not taking the Auditor General’s warning signals seriously .
While Mme Freeland extols the merits of a Canada which will intervene to support access to housing and curb inflation, there is this other Canada, that of the bureaucracy which swells according to announcements and measures. The Parliamentary Budget Officer (PBO) estimated that the size of the federal government had increased significantly since the election of Justin Trudeau, without Canadians feeling the effects of this increase in service delivery. The irony is that the government has at the same time increased the use of subcontracting and external professional services.
This vast public policy objective to improve the lot of the middle class came at the expense of the country’s room for maneuver. The risk of a severe recession seems to dissipate for 2024, but if economic headwinds were to blow the cold of the slowdown in subsequent years, the government would run out of intervention levers… Unless increase the tax burden on Canadians or increase debt further. It is a thankless legacy for future generations.
The projected deficit is 35.3 billion in 2022-2023. It will be 40 billion for the next cycle. By 2028-2029, if the assumptions come true, the government will have added $221 billion to the federal debt in seven fiscal years. Debt management is already starting to weigh more heavily on public finances with the tightening of interest rates. Canada has the best credit rating there is (AAA), but the fact remains that debt servicing costs will increase, reaching 46.5 billion in 2023-2024, and 60.7 billion in 2028-2029. Expressed as a percentage of GDP, however, debt costs remain among the lowest in more than 40 years. And again, Canada is the envy of the G7 countries.
Recently, the Governor of the Bank of Canada, Tiff Macklem, asked governments to control their spending so as not to fuel inflation. The government will have done the exact opposite. By continuing its strategy of increasing spending, at a rate higher than anticipated inflation in the years to come, the Liberals will contribute to a problem they wish to resolve: the increase in the cost of living.
The Trudeau government therefore finds itself with its back against the wall. Limited in its room for maneuver, still in deficit, it is now tackling these two ambitious projects: accessibility to housing and the rise in the cost of living. He could easily miss the mark, and show up at the polls with a lot of red ink on his hands, without Canadians being any better off.