Recently, federal Finance Minister Chrystia Freeland commented on Canada’s inflation challenges and the federal budget. Unfortunately, many of these statements were misleading, with Freeland doubling down on the Trudeau government’s approach to fiscal policy.
Responding to questions about the government’s approach to addressing inflation, Freeland repeated the claim that the latest federal budget was a “very fiscally-responsible budget.” However, this claim bears little semblance to reality.
While the projected federal deficit declines from $113.8 billion in 2021/22 to $52.8 billion in 2022/23, this is not due to prudent spending or responsible financial management. Instead, the country’s economic rebound, high oil and gas prices, and high inflation allowed Ottawa to benefit from an influx of revenue.
Despite this good fortune, the Liberal government opted to increase spending rather than move more expeditiously towards a budget balance. In the 2021 spring budget, Freeland announced program spending for the fiscal year 2022/23 totalling $411.9 billion. Only a year later, when the government delivered its 2022 budget in April, it planned to spend an additional $22.4 billion.
In addition, the government added new spending that had nothing to do with COVID, including new permanent programs such as national dental care and $10-a-day daycare with at least several billion in annual spending planned. These programs will be financed entirely through borrowing, meaning the debt borne by Canadians will continue to rise.
Further, the government has yet to introduce national pharmacare, which means annual spending will continue to climb in the future.
Contrary to the rhetoric, the government made little to no attempt to pump the brakes on federal spending and eschewed a fiscally responsible budget this year.
Freeland has also claimed Canada has the lowest net debt as a share of the economy (GDP) among G7 countries. But this is misleading and requires further context. Using net debt as a metric favours Canada in international comparisons because it misrepresents our debt-to-GDP ratio.
The figure cited by Freeland includes assets of the Canada and Quebec Pension Plans, which effectively lowers Canada’s debt levels. However, these pension assets are required to finance promised benefits to current and future retirees. So it’s misleading to make international comparisons using net debt-to-GDP ratios.
However, when we compare Canada to G7 countries using gross debt (total liabilities of government) as a share of the economy, Canada ranked fourth out of seven—not first—on debt-to-GDP in 2020.
If we expand the analysis further to include 29 industrialized countries, Canada ranked 25th on indebtedness with only Japan, Italy, Portugal, and the United States having higher levels of debt. This casts doubt on Freeland’s assertion that Canada has relatively low debt compared to peer countries.
Lastly, Freeland has argued that the job of bringing down inflation is chiefly the responsibility of the Bank of Canada. While the central bank plays the most prominent role in combatting inflation, fiscal policy choices also affect inflation.
Put differently, the government has a role to play in addressing inflation and should reduce spending to do so. It’s not just a Bank of Canada responsibility.
Despite recent comments from Minister Freeland, the Liberal government can do much more to tackle inflation and demonstrate true fiscal responsibility by constraining spending and debt levels.
