Canada’s governing Liberal Party on Tuesday unveiled a 2024 budget that will see spending increase by more than $53-billion over the next five years compared to what was announced in the Fall Economic Statement just six months ago.
Absolutely incredible.
This new expenditure will be partly offset by (misguided) capital gains tax increases, and still leaves the country’s deficit running near $40-billion right through the 2026 fiscal year and modestly above the levels that were previously projected. At no time in the next four years is the federal debt forecast to come in below 40 per cent of GDP. That is a travesty.
The 2024 budget does nothing to arrest the persistent post-COVID-19 fiscal slippage that has been allowed during Prime Minister Justin Trudeau’s third mandate, while also raising the tax burden at a time when Canadian businesses are struggling to make gains in competitiveness and productivity. The fresh spending growth will also only make the Bank of Canada’s job of bringing interest rates down from their very high levels that much tougher.
What this budget does is make Canada’s fiscal deficits that much more structural in nature in the sense that public debt charges are destined to swell from $47-billion this year to $57-billion three years out – by which time, interest on the debt will be exceeding the deficit itself, by a significant amount.
The $53-billion in new spending raises total program spending (excluding debt service charges) to 16 per cent of GDP in 2024-25, up from 15.6 per cent in 2023-24 and a full percentage point higher than the 15 per cent projected for 2024-25 in the 2021 budget.
The pre-COVID-19 norm on this ratio was 14.5 per cent. On a $2.8-trillion GDP base, this is a very serious deviation. On average, the deficit now promises to be around $2-billion higher annually over the next five years than was forecast in the Fall Economic Statement. That’s an enormous miss over a period during which a normalization and rationalization from the expansionary COVID-19 days was in order. Imagine what happens to fiscal finances if the economy ever does slip into an official recession – this Liberal government, in stark contrast to its predecessor in the 1990s but in keeping with the Pierre Trudeau era of the 1970s, has left the country’s balance sheet deeply vulnerable if the economy does end up tipping over.
While there were measures we liked from a policy perspective, a sense of prioritization and control was sorely lacking; no major cuts were made to offset the new spending, so the deficit grows and the overall economic impact will be negative.
In a limited attempt to make offsets on the revenue side of the equation, the government introduced new tax measures headlined by higher capital gains taxes on individuals and corporations. The changes in the treatment of capital gains are bound to distort incentives in the private sector and work against the one key source for supply-side growth that Canada has been lacking for many years – risk-taking and capital investment. What’s more, these higher taxes will hurt Canadian competitiveness and investment at a time when productivity has flatlined and real per-capita incomes are in secular decay.
An opportunity was missed to put Canada on sounder fiscal footing – instead we’ve seen a deterioration on the spending side and a heavier tax burden. We have witnessed continuous fiscal slippage in the wake of COVID-19. That shifts the onus of responsibility and restraint onto the Bank of Canada and hurts its ability to normalize policy and that in turn raises fiscal debt-service costs.
Adding to our concern over the fiscal outlook is that some of the economic assumptions underlying the projections look a tad optimistic. (Though this at least is not the fault of the government – forecasts are taken from a panel of private sector economists.) GDP growth projections of 0.7 per cent in 2024 are probably reasonable, but the rapid snap-back to 2 per cent predicted from 2025 onward is no slam-dunk, and the risk is very much skewed to the downside. More importantly, the 2024 assumed inflation level is roughly 3 per cent. Tuesday’s Consumer Price Index release already showed almost every measure of inflation running below that level, and trending downward fast.
So, the 3.8-per-cent growth figure that the revenue projections are built on is unlikely to pan out, and the deficit will likely end up deeper than projected. Not only that, but the budget forecast that short-term interest rates plunge by more than 1.5 percentage points from now to the end of next year may end up being pie-in-the-sky because the very nature of the spending stimulus in this document could work against that forecast coming to fruition.
In essence, the surge in borrowing requirements is hardly good news for the Government of Canada bond market; the incremental spending growth is at odds with BoC policy, and the shifting tax regime, at the margin, will keep productivity on its secular downtrend and the antidote for this anti-competitive budget will be a future of continuing Canadian dollar depreciation – which will only make us all poorer as a nation.
This budget deserves a failing grade.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave. Dylan Smith is senior economist with the firm.
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