Budget Watchdog Says Ottawa Has Fiscal Room to Reduce Taxes or Increase Spending

Parliamentary Budget Officer Yves Giroux prepares to appear before a committee in Ottawa, on June 13, 2022. The Canadian Press/Justin Tang

The federal government can afford to increase spending or cut taxes by 1.5 percent of gross domestic product (GDP) annually for the next 74 years and still maintain fiscal sustainability, according to a report from the Parliamentary Budget Officer (PBO).

In current dollars, that would mean Ottawa could increase or decrease spending by $46 billion while also stabilizing the net debt over the long term, PBO Yves Giroux said in his 2024 fiscal sustainability report.

“Based on our projection, the federal government’s net debt of 29.1 percent of GDP in 2023 would be eliminated in 2058 in the absence of policy changes,” the report says.

The latest report’s estimate of 1.5 percent is less than the PBO’s 2023 evaluation of 1.7 percent of GDP. The change is due to an increase in spending that offsets the rise in revenues, coupled with higher interest rates that limit fiscal flexibility, the report says.

The annual report aims to evaluate long-term economic growth to determine if adjustments to fiscal policy are necessary to prevent problematic debt levels.

“From the perspective of the total general government sector, that is federal and subnational governments and public pension plans combined, current fiscal policy in Canada is sustainable over the long term,” the report says, although it notes results were not rosy for all provinces and territories.

Provincial Positions and Pension Plans

Fiscal gap refers to the ability of a government to boost spending or lower tax rates without harming long-term sustainability. While the federal fiscal gap sits at 1.5 percent of GDP, the number for the provinces and territories is lower, meaning they have less leeway to increase spending or decrease taxes.

Five provinces currently have sustainable fiscal policies, according to the report’s findings. Only Quebec, Saskatchewan, Ontario, and Nova Scotia have the capacity to increase spending or cut taxes, while Alberta maintains sustainability but operates at a break-even point.

Quebec has the most wiggle room at 1.4 percent of provincial GDP while Alberta has the least at 0 percent. Saskatchewan sits at 0.6 percent while Nova Scotia and Ontario both have 0.3 percent flexibility to make changes.

The remaining provinces and territories—Newfoundland and Labrador, New Brunswick, Prince Edward Island, Manitoba, British Columbia, Yukon, Northwest Territories, and Nunavut—must either raise taxes or implement spending cuts to achieve sustainability until 2098, the report says.

The amount of policy action required to achieve fiscal sustainability ranges from 0.5 percent of provincial GDP in Newfoundland and Labrador to 5.9 percent combined for the three territories.

“Compared to our previous assessment, the subnational fiscal gap is effectively unchanged,” the report reads. “Improvements in the fiscal gaps of Ontario and Manitoba offset the deterioration in British Columbia, Quebec, Saskatchewan and other provinces.”

The report also looked at the fiscal sustainability of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) and determined the existing framework of both plans to be viable throughout the PBO’s 75-year financial forecast.

The PBO said there is sufficient fiscal flexibility to raise benefits or lower contributions by 0.2 percent of Canadian GDP for the CPP and by 0.3 percent of Quebec’s GDP for the QPP, as long as the net asset-to-GDP ratio remains unchanged from its initial value after 75 years.