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Finance Minister Chrystia Freeland, following decades-long tradition, buys a pair of shoes a day ahead of her delivering the 2023 Budget, at fashion retailer Simons in Ottawa, on March 27.PATRICK DOYLE

Kevin Page is the president of the Institute of Fiscal Studies and Democracy at the University of Ottawa and a former parliamentary budget officer.

In a high-inflation environment with dark clouds on the economic horizon, a credible fiscal strategy should demonstrate caution. Acknowledge downside economic risks. Limit new measures. Maintain fiscal rules. On balance, the 2023 budget has a credible fiscal strategy.

Canada’s economic outlook has weakened. Private-sector forecasters expect little to no growth in 2023. Short-term interest rates are higher than anticipated. This weaker outlook puts pressure on planned deficits – tax revenues shrink and, meanwhile, governments are spurred to spend more to boost the economy.

The government’s fiscal room to manoeuvre, however, is shaped by not just this outlook but also its need to restrain spending to maintain a declining deficit-to-GDP ratio – what it refers to as its fiscal anchor. In a high-inflation environment, the government also needs to limit new spending that would boost inflationary pressures.

In that context, the 2023 budget is a modest budget with respect to measures that increase planned budgetary deficits. Despite going up slightly for the year, the planned federal debt-to-GDP ratio turns down over the longer term.

There are $43-billion in net new measures over a six-year period. That is not a large number for a government that spends almost $500-billion in one year, and an economy that has a GDP of about $2.8-trillion. The profile of net new spending is relatively flat. Net new spending in 2023 largely goes to people struggling with high inflation (those on low incomes and students) and our health care system. This is not spending that will impede efforts to lower inflation.

There are three major policy priorities in this budget: help vulnerable people deal with high inflation; strengthen our health care system, including through the provision of dental care for people without coverage; and invest in a clean economy.

For these priorities, about $31-billion is allocated to health, $21-billion to a clean economy and $5-billion is allocated to vulnerable people. To offset higher spending, the government announced about $10-billion in spending restraint measures in other areas and plans on generating an additional $12-billion in revenues from wealthier people and businesses. Is this an efficient allocation? The government argues yes. Opposition parties will likely argue no.

More spending and revenue will likely be needed to facilitate the transition to a clean economy, address climate change, promote inclusion and close spending gaps on national defence and foreign assistance. Now is not the time to delay on these important issues. Short-term economic circumstances are limiting action on longer-term priorities.

The budgetary deficit is projected to fall modestly – to $43-billion in 2022-23; $40-billion in 2023-24, and $35-billion in 2024-25. This level of deficit is a dramatic reduction from the deficits posted during the COVID lockdowns ($328-billion in 2020-21). The decline reflects the rebound in the economy and the unwinding of pandemic-related fiscal supports.

The flat profile for the budgetary deficit over the next few years reflects in large part the expected slowdown in the economy. If the economy turns out to be weaker than expected, an increase in the deficit is unavoidable. Budgetary deficits of about $40-billion represent about 1.5 per cent of GDP. It is modest in historical terms and modest relative to expected deficits in other OECD economies.

While the fiscal credibility of the 2023 budget would be strengthened if the government built in reserves for downside risks, Canada’s fiscal stance is relatively well positioned for a less-than-soft landing for the economy.

The federal government’s debt-to-GDP ratio stands at 43.5 per cent in 2023-24. It is up slightly from 2022-23 (reflecting the weak GDP growth) and is expected to fall to about 40 per cent in 2027-28. The government’s fiscal anchor of a declining ratio is maintained.

This level of debt is high for Canada. Significant progress was made to lower the debt-to-GDP ratio in the 1990s and early 2000s. While the government will argue that Canada’s debt-to-GDP ratio is low relative to other countries (true), Canadians, now and in the future, will pay higher public debt charges in both in nominal terms and as a percentage of GDP. It would be good for the government to strengthen its budgetary constraints.

There are two planning risks with respect to the fiscal outlook that could translate into higher-than-projected deficits. The government projects that revenues will rebound to high levels relative to the size of the economy. The government plans to hold its direct spending constant over the next five years. More measures to constrain spending and increase revenues are likely needed to get on a declining deficit track over the medium term.

In a highly uncertain and volatile economic environment, fiscal strategies will be tested. Fiscally credibility has to be earned budget by budget. The 2023 budget gets a thumbs-up.