What Canadians need from this week’s mini-budget is for its government to restrain itself

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In preparing for Tuesday’s midyear mini-budget, Justin Trudeau’s Liberal government is surely feeling a strong desire – as it usually does – to pull some fiscal levers in order to do, well, more.

More to avert a recession.

More to address the housing crisis.

More to awaken slumbering productivity.

More to help with the rising cost of living.

But right now, maybe the best thing this government could do is less.

What Canadians need from the Fall Economic Statement (as it’s formally called), more than any other economic priority, is for the government to get its foot off the inflation accelerator.

As the Bank of Canada noted in its recent quarterly Monetary Policy Report, government spending in Canada is on track to grow at about 2.5 per cent annually over this year and next. That exceeds the pace of growth of potential output (the economy’s capacity to supply goods and services), which the central bank estimates at about 2 per cent annually.

What this means is that government’s contribution to overall demand in the economy – through spending – is expanding faster than the economy can supply it. That makes government spending a net contributor to inflation.

Ottawa is still adding to that inflationary spending pile. Based on last spring’s budget, federal program spending is expected to rise 2.5 per cent in the 2023-24 budget year, and 3.7 per cent in 2024-25.

That’s hardly extravagant by historical standards; in fact, it would be the slowest two years of spending growth in a decade, excluding the years in which pandemic programs wound up. Nevertheless, it’s enough to add to a growing fiscal footprint that is contributing to the nagging inflation problem – doing the Bank of Canada no favours as it fights that problem with the highest interest rates in more than two decades.

Bank of Nova Scotia published a report Friday estimating that growth in spending at all levels of government since 2019 has required the Bank of Canada to raise rates by about two percentage points more than it otherwise would have, to cool an overheated economy and rein in inflation. It estimated that spending increases at the federal level alone have been responsible for a little over half of that.

“The share of government spending in relation to economic output has risen substantially,” the report said. “The economy would not have been in excess demand we’re it not for this surge in government spending.”

“Our results suggest that fiscal policy was badly miscalibrated since the pandemic, from an inflation management perspective,” the report concluded.

Reversing this should be the government’s No. 1 priority. Its prime objective should be to make fiscal policy part of the inflation solution, rather than part of the problem.

Admittedly, budgetary belt-tightening is not standard operating procedure in a recession or near-recession – which is where the Canadian economy finds itself. We normally look for government to lean in with a bit of fiscal generosity during downturns, to help stimulate the economy out of its slump. Frankly, this Liberal government has never needed much excuse for such fiscal leanings, regardless of economic conditions. Prior to the COVID-19 pandemic, the Justin Trudeau Liberals increased program spending by an annual average of 6.5 per cent.

As usual, there is no shortage of issues at which the government could direct its fiscal nozzle. Housing supply is front and centre. The cries for help on rising costs for necessities – food and rent – have grown louder. Small businesses want more relief from the looming deadline to repay the emergency loans that the government provided during the pandemic.

“The temptation is going to be to do more,” said Jean-François Perrault, chief economist at Bank of Nova Scotia, in an interview. “In doing so, that would frustrate the Bank of Canada’s efforts to slow the economy even further. To me, that’s the big risk.”

But if there was ever a time for the Liberals to resist that temptation, this is it. Wrestling inflation to submission will allow the Bank of Canada to ease its stiflingly high interest rates – reducing the major pressure that is common, even central, to all of the above issues.

Not spending does not have to mean doing nothing. Matthew Holmes, senior vice-president of policy and government relations at the Canadian Chamber of Commerce, would like to see Ottawa turn its policy attention toward unlocking business investment – to put private-sector money to work, rather than relying on public funds.

For starters, he says, the government could nail down the long-overdue details of its investment tax credits for green technologies that it promised in last spring’s budget, which are still in development eight months after being announced. It could take aim at a tangled web of regulatory red tape, which the business community has long argued raises business costs and impedes investment. It could get serious about reducing interprovincial trade barriers.

And let’s face it: The Liberals have spent eight years in power expanding the government’s spending footprint, and the economy hasn’t exactly thrived as a result. Federal program spending as a share of GDP is about 16 per cent today, compared with about 13 per cent when the Liberals took power in 2015. Many of the key economic challenges that the Liberals promised to tackle – productivity, innovation, competitiveness – may be in worse shape now than when the Liberals arrived. Maybe bigger government isn’t the answer.

“On the spending thing, I would ask the federal government: Is it working?” Mr. Holmes said. “At this point in time, by what measure are they feeling like this is working?”