Why Is the Federal Government’s Projected Deficit Higher Than Anticipated?

The Canadian flag flies atop the Peace Tower on Parliament Hill in Ottawa on Oct. 30, 2024. The Canadian Press/Sean Kilpatrick

The increased deficit figures released to Canadians in the Liberals’ mini-budget added to an eventful day in Ottawa on Dec. 16, as the government went over the guardrail set by the newly resigned finance minister.

The now former Deputy Prime Minister and Finance Minister Chrystia Freeland had pledged last year to keep Canada’s deficit just below $40.1 billion. The fall economic statement released Dec. 16 said the deficit would have been approximately $40.8 billion if not for “significant unexpected expenses” related to indigenous contingent liabilities, which cost $16.4 billion, and allowances for COVID-19 pandemic supports totalling $4.7 billion.

The update also includes $1.3 billion over six years to bolster Canada-U.S. border security amid the threat of tariffs by incoming U.S. President Donald Trump.

Kevin Page, the former Parliamentary Budget Officer from 2008 to 2013, told The Epoch Times that the government was “caught by surprise” by this budget deficit. “They would not have had a fiscal target of a $40 billion budgetary deficit if they thought they would have to absorb an additional $21 billion in contingent liabilities,” he said. Still, he said, the latest ballooning deficit is a hit to the government’s “fiscal planning credibility.”

The 2024 Fall Economic Statement noted that since 2016, the federal government has spent over $60 billion to resolve indigenous claims, which include giving $23.3 billion to First Nations children and families after a court ruling said they had been harmed by discrimination. With the government prioritizing settling these litigations out of court, there has been an increase in the number of settlements and their value in recent years, leading to higher expenses.

In the 2022–23 fiscal year, the government spent approximately $26 billion to resolve past injustices, which increased the budget deficit to $35.3 billion. If not for these payments, the budgetary deficit would have been just $9 billion.

In July 2024, Parliamentary Budget Officer Yves Giroux noted that the outstanding provision for contingent liabilities as of March 31, 2023, amounted to $76 billion. “This amount has increased significantly in recent years, with an average annual growth of roughly 30 percent since 2016,” he said.

The fall economic statement said the government is unable to “estimate with certainty” when the liabilities would be paid, or if they would be paid at all, since these matters are negotiated with other parties or are currently before the courts.

The government said that, from a fiscal management perspective, accounting for the costs of these indigenous claims can be “challenging and unpredictable.” Despite this, the statement says the government is committed to reconciliation, and ministers will develop a “clear plan” to ensure “financial predictability and sustainability.”

In the House of Commons on Dec. 17, Conservative House Leader Andrew Scheer said the higher deficit means Canadians are now shouldering more burden of interest payments.

“Canadians have to pay back all that money with interest, and 43 cents of every dollar you earn now has to go to pay the tax burden—more money to bankers and bondholders,” he said.

Conservative Deputy Leader Melissa Lantsman also questioned why the government exceeded its own deficit guardrail. Dominic LeBlanc, who was sworn in as finance minister on Dec. 16 following Freeland’s resignation, responded that the government was attempting to be transparent about the “fiscal picture of the government” and had detailed in the economic statement the contingent liabilities that increased the deficit projection.

“This is about righting historical wrongs with indigenous peoples, something the previous Conservative government ignored,” LeBlanc said. “We think the responsible thing to do is to be transparent with Canadians. That’s exactly what we did.”

Paul Beaudry, an economics professor at the University of British Columbia, said the economic statement does not include many new government programs, which is unsurprising when the government is exceeding its deficit forecast. He said the government will need to determine whether the spending on indigenous liabilities is a “one-time costing” or whether it will continue increasing in value and become “more problematic and needs to be further looked into.”

Allowances for COVID-19 Pandemic Supports

The fall economic statement said the government delivered COVID-19 programs to assist Canadians, such as securing vaccine supplies, providing financial support through the Canada Recovery Benefit, and supporting nearly 900,000 small businesses and not-for-profit organizations through the Canada Emergency Business Account (CEBA). However, it said there is now “a diminishing amount of pandemic legacy costs.”

The government projects it expects to record $1.2 billion in 2023–24 to write down expired COVID-19 vaccines and therapeutics. Additionally, a $3.5 billion provision in that fiscal year is anticipated to be recorded for loans and receivables associated with the pandemic emergency support measures to help Canadians.

The economic statement added that the government is using a “firm but fair approach” to reducing the provision for loans. It said that this provision will be adjusted as more repayment information becomes available and as loan recovery progresses.

Canada’s Auditor General Karen Hogan recently released a report finding that the CEBA program lacked the proper oversight to ensure “value for money” and gave out $3.5 billion in loans to ineligible recipients. She criticized Export Development Canada, which oversaw the program, for relying on sole-source contracts with one vendor without having strong checks and balances.

Export Development Canada said it agreed to all of the auditor general’s recommendations except for one, to “explore options to recoup partial loan forgiveness” impacting 3 percent of loans, saying this would be “challenging and may also come at significant cost.”