Federal Finance Minister Chrystia Freeland holds the Canadian spending record. From budget to budget, the first woman to occupy the position of major federal financier finds new pretexts to increase the size of the State.
If COVID-19 had provided him with a legitimate reason to open the floodgates, with generous income support programs, Mme Freeland continued its momentum well after the pandemic ended. It has thus become a ritual: each spring budget and fall economic statement that she submits revises upwards the spending forecasts of the previous document. What will the budget she is preparing to table on April 16 have in store for us? If the past is a guarantor of the future…
In his economic statement last November, Mr.me Freeland surprised many analysts by setting ambitious targets for capping future deficits. This was all the more surprising since she had missed her previous targets for reducing the federal debt, which were less restrictive. But the financial markets expected more rigor from her and she could no longer ignore their concerns. Thus, in the economic statement, she promised to put the deficit on a downward trajectory in 2024-2025 and to keep deficits below 1% of gross domestic product (GDP) from 2026-2027. Will she be forced to renege on this promise?
In a report released this week, the Parliamentary Budget Officer (PBO) said he expected the deficit for the year 2023-2024 to amount to $46.8 billion (1.6% of GDP). ), well beyond the 40 billion that Mme Freeland had anticipated this in his fall statement. Such a gap would in itself make it more difficult to achieve the target of a deficit below 1% of GDP in 2026-2027. But the launch of new programs, including a national and universal drug insurance program, not to mention an increase in defense spending, as demanded by our allies, would make the task almost impossible without a significant increase in taxes.
Rising interest rates are pushing up interest costs on the federal debt, which has almost doubled since 2016 to reach more than $1.2 trillion (42.4% of GDP). According to the PBO, the debt service ratio, that is, interest costs compared to total revenues, increased from 7% before the pandemic to 10.2% this year and will reach 10.7 % in 2028-2029 — assuming that Ottawa does not further increase its program spending.
Former Bank of Canada Governor David Dodge has already warned the federal government to avoid a debt service ratio of more than 10%, otherwise it risks creating a situation similar to that which Canada experienced in the 1990s and which ended up causing a budgetary crisis.
Generally, this kind of warning does not move Prime Minister Justin Trudeau much. In response to a letter sent in January by the Business Council of Canada, which had called on his government to exercise better control over spending, he said he intended “to continue to be there to support Canadians during a difficult period . […] This does not come with austerity and cuts, as many in the business community and conservative politicians are proposing.”
The April 16 budget will likely be the penultimate one before the next federal election. The temptation will be great for Mr. Trudeau and Mr.me Freeland to further open the floodgates to stimulate economic growth – which has been stalled for several months, despite a slight rebound in the last quarter of 2023 – and to regain the confidence of voters who have abandoned the Liberals since the 2021 election.
However, any increase in government spending would contribute to inflation and delay interest rate cuts by the Bank of Canada. This week, the Canadian central bank decided to maintain its key rate at 5%, disappointing indebted households who were hoping for a little respite. The next meeting of the Bank’s board of directors will take place in early April. But the Bank will undoubtedly want to see what M’s budget has in store.me Freeland on new spending before starting to cut its key rate. Many analysts expect a first drop of 0.25% to occur next June — but only if Mme Freeland is not too spendthrift in her April 16 budget.
Given his track record as Minister of Finance, this will be a significant challenge.