Inflation, Debt-Servicing Costs Add Challenges to Upcoming Federal Budget

Finance Minister Chrystia Freeland rises during question period in the House of Commons on Parliament Hill in Ottawa on Feb. 13, 2023. The Canadian Press/Patrick Doyle

News Analysis

Inflation will make the upcoming federal budget a tough balancing act of offering Canadians relief for cost-of-living increases without increasing deficits or triggering an election.

The federal budget will be tabled March 28 and is expected to offer affordability measures, provide investments to help transition to a net-zero carbon economy, and designate already-promised higher health transfers to the provinces.

In June 2022, the consumer price index (CPI) in Canada rose to its highest mark in four decades at 8.1 percent year-over-year. Although the most recently released CPI, from January, was a more moderate 5.9 percent, cost-of-living pressures remain top of mind for many Canadians.

Hamish Telford, a political science professor at the University of the Fraser Valley, said the government must address Canadians’ affordability challenges thoughtfully.

“We’ve got affordability issues because of inflation. And government spending, of course, can spur inflation. And so, it’s a difficult needle to thread,” Telford said in an interview.

Last November, the government temporarily doubled the GST tax credit, an option that could be renewed for the coming fiscal year. However, federal capacity to help Canadians has diminished due to increased public debt, which mushroomed from $704.1 million in March 2020 to $1.14 trillion in March of 2022.

“They’re trying to bring the deficit down after COVID, and trying to get the debt on a downward trajectory relative to GDP. This is a difficult issue for them to address people’s needs while maintaining a semblance of fiscal prudence,” Telford said.

“This is a government that likes to spend. It’s difficult, for what they consider to be restraint might not be restraint in other people’s books.”

This year’s deficit was only $2.2 billion at last count, but higher lending rates on higher public debts mean servicing costs will continue to snowball. During the third quarter of fiscal 2022–23, interest payments were up $2.7 billion, or 15.5 percent, over the same period in 2021–22.

Steve Ambler, a professor of economics at Université du Québec à Montréal, believes the government can’t ignore the coming wave of debt-servicing costs.

“They will have to borrow at higher, much higher, interest rates than they could a couple years ago, which you would think would put the fear of God into them, but we shall see,” Ambler told The Epoch Times.

“I’m not entirely convinced that they are at all serious about getting this under control, myself. They still seem to be going, ‘It’s good, it’s OK, as long as the debt-to-GDP ratio doesn’t explode.’”

The federal net debt-to-GDP ratio, which was 31.2 percent at the end of fiscal 2019–20, rose to 47.5 percent in the pandemic year that followed, and has dropped slightly since then, to a projected 43.7 percent at the end of fiscal 2022–23.

Ian Madsen, senior analyst for the Frontier Centre for Public Policy, said an ideal budget would restore spending to pre-pandemic levels to diminish the coming wave of debt-servicing costs.

“The only caveat would be that defence spending should rise somewhat higher, to glacially, eventually, reach the level of 2 percent of GDP that is the commitment under NATO. But [that’s] hard to accomplish given the procurement problem of it taking eight years to get anything purchased and delivered in hand,” Madsen said.

“A hiring freeze in most departments would be helpful, of course, but unlikely.”

‘Just Transition,’ Health Care

Last October, the US$500 billion Inflation Reduction Act (IRA) in the United States included new spending and tax breaks to boost clean energy, reduce health-care costs, and increase tax revenues. It’s possible Canada will take a similar approach, though Ambler is opposed.

“The so-called ‘just transition’ [has] already gone a long way to decimate business investment spending in Canada ... [which] right now is just a complete disaster. A lot of it is because of the federal government threatening to destroy the energy industry,” he said.

“[Now they’re] talking about essentially destroying Canadian agriculture by an absolute reduction of 30 percent [emissions from] the use of nitrogen fertilizers. That’s just crazy.”

Telford suggests that the just transition is unpopular with Prairie voters but that budgetary measures on climate-change policies and improvements to public transit would be welcomed by the Liberal support base.

“Liberal attention is elsewhere, and that is on the urban centres of Canada, suburbs as well, and trying to ensure that they maintain that support,” he said.

“A big concern for a lot of Canadians is health care, and the federal government addressed that, for better or for worse, in the in the deal they made last month with the provinces.”

In February, Ottawa and the provinces agreed to increase health care funding by $196.1 billion over 10 years, of which $46.2 billion was above already-slated increases. Such expenditures may be to keep the minority government alive with NDP support.

“The NDP has to see NDPish things there, and no poison pills, that is, things that the NDP would strongly object to, in order to get their support and get this budget past Parliament,“ Telford said. ”I don’t think the Liberals are looking to bring down their own government at this time.”

Nelson Wiseman, an emeritus professor of political science at the University of Toronto, agrees.

“This will not be a pre-election budget because I do not anticipate an election until next year at the earliest. It will more likely be in 2025,” Wiseman told The Epoch Times.

“I expect the debt to increase as the budget will be in deficit,” he said.

“However, the debt to gross domestic product will likely decrease—the measure most commonly used now by economic analysts to determine whether there is a path to budget balance and sustainability. A challenge will be that debt payments will eat up more of spending because of the rise in interest rates.

“The budget will talk about inflation and affordability, but government policy will have little influence on inflation or disinflation. They are global phenomena.”