Ottawa once again did not provide a path to a balanced budget in its latest update on its economic plan and the state of Canada’s economy. Even as the deficit and debt as a share of the economy are expected to gradually decline, the country’s fiscal position in the later years of the feds’ projection horizon has worsened from Budget 2023’s forecasts in March.
Finance Minister Chrystia Freeland, in her fall economic statement (FES) speech to the House of Commons on Nov. 21, characterized the significant investments in public transit, in electric vehicle (EV) plants, and in new energy projects as “foundational investments which only government can make.”
Carleton University business professor Ian Lee said that “foundational investments” is “political spin” and that if it refers to money for battery plants for EVs, that would be “strategically foolish” since Canada would be competing against a number of countries far more capable in EV manufacturing.
The two major spending initiatives in the FES have to do with housing ($6.25 billion) and the green economy ($9.38 billion) over the current and next five fiscal years ending 2028–29. The government also expects to save $2.56 billion with cuts to the public service and other efficiencies.
The Liberal government repeatedly says its economic plan is “responsible.” Canada has the lowest deficit-to-GDP (gross domestic product) and lowest net debt-to-GDP ratios in the G7, Minister Freeland noted.
“Years of responsible fiscal stewardship have left Canada in an enviable fiscal position relative to our global peers,” according to the 2023 budget.
The feds rely on a declining federal debt-to-GDP ratio over its projection horizon as its “fiscal anchor,” or guardrails on spending. The FES says the plan it outlines will enable that ratio to decline from 2024–25 onwards, reaching 39.1 percent in 2028–29. The plan will also focus on maintaining the 2023–24 deficit at or below Budget 2023’s projection of $40.1 billion as well as keeping deficits below 1 percent of GDP in 2026–27 and thereafter.
“They kicked it [fiscal anchor] down the road, because they’re trying to get the benefit of announcing it without having to accept the consequences of doing some cuts right away,” Mr. Lee said.
But Mr. Lee also says that this tighter fiscal anchor will effectively kill universal pharmacare, which is expected to come at a cost of over $20 billion.
“Universal pharmacare was a terrible, terrible program proposal, because it involves giving free drugs to high-income Canadians in the top three quintiles. And that’s just wrong,” he said.
Deeper Into the Red
The sum of total new spending since the budget and including the FES measures is $20.8 billion over the next six years. While the deficit for fiscal year 2023–24 has declined very slightly from $40.1 billion to $40 billion since Budget 2023, the worsening of the deficit is seen in the later years.Compared to Budget 2023, the deficit is expected to worsen by almost $10 billion in fiscal year 2027-28—from $14 billion to $23.8 billion.
“The language is just enough to give me a headache,” said Steve Ambler, professor emeritus of economics at Université du Québec à Montréal and monetary policy expert, in a November 22 interview.
“They’re claiming to be responsible, because, from starting in 2024, they’re saying that it’s [deficit] going to go down. Now, whether you want to believe that or not, is a big question. I frankly am pretty skeptical.”
Mr. Ambler said he’d like to go back and look at the last few budgets and fall economic statements and compare deficit projections, as new spending measures are always announced—especially in the run-up to an election.
“I tend to believe that they’ve been systematically under-predicting increases in spending,” he said.
Also of note, the interest cost for the debt has climbed significantly since the budget projections. For fiscal year 2023–24, the projection goes up from $43.9 billion to $46.5 billion, and in fiscal year 2027-28, it is higher by $8 billion (from $50.3 billion to $58.4 billion).
These public debt charges are forecasted to be the highest since 2010, when they represented 1.7 percent of GDP, but are a far cry from being north of 6 percent of GDP as they were from 1989 to 1991.
Analysis from Scotiabank published on Nov. 17 identified that all levels of government spending account for about 2 percentage points of the 4.75 percentage points of Bank of Canada rate increases since early 2022.
“The economy would not have been in excess demand were it not for this surge in government spending,” according to the report.
However, Scotiabank said more blame lies with provincial government spending on goods and services, which was more than triple that of Ottawa’s spending, and that alone accounts for about a third of the increase in the BoC’s policy rate.
Mr. Lee said he didn’t think the government was being responsible and that the spending is sure to stoke inflation.
“We’re trying to cool it [the economy] down to get inflation down because it’s over- stimulated. So the government continued to over-stimulate the economy unnecessarily,” he said.
Misfire on Housing
BMO chief economist Doug Porter said in his analysis that while there is more deficit spending, the amount of it is relatively small, at just 0.1 percent of GDP.“Some of it [is] at least well intended, with the goal of adding to the supply side,” he said.
Increasing housing supply and affordability was a major focus for the feds, and one of the notable announcements in the FES was an additional $15 billion in new loan funding, starting in 2025-26, to support more than 30,000 additional new apartments.
“This is symbolic politics to pretend that they’re solving the crisis when they’re not solving the crisis,” Mr. Lee said.
This suggests the problem of lack of housing is caused by a lack of capital, when, in fact, it isn’t, he added. Mr. Lee said the housing crisis is also due to governments wanting to prevent urban sprawl and its impact on the environment.
“We’ve got to change the whole housing framework in Canada to take away the red tape, all the barriers, the zoning regulations, the restrictions that restrict us from building houses,” Mr. Lee said.
The government also provided an economic update based on the average forecast of private-sector economists. Overall, these economists expect the economy to grow 1.1 percent in 2023, which is higher than the 0.3 percent projected in Budget 2023 in March. But they expect growth to slow significantly to 0.4 percent in 2024—compared to Budget 2023’s projection of 1.5 percent—before rebounding to 2.2 percent in 2025.
The feds say unemployment is expected to rise to 6.5 percent in the second quarter of 2024, but that this is far below the peaks of unemployment during prior recessions. However, Canadians are also more indebted than they’ve been in prior economic downturns.
Economists expect rate cuts starting in the second quarter of 2024, with the Bank of Canada’s overnight rate target falling to 3.75 percent by the fourth quarter and to an average of 2.9 percent in 2025.
