It’s budget season in Ottawa, with the Liberal government already in the fray, attempting to shape perceptions of the spending – er, fiscally prudent – plans that will emerge some time in the next couple of months.
“There is still a lot of uncertainty in the world economy,” Finance Minister Chrystia Freeland told reporters last month. “And that means that we do need to continue to take a fiscally prudent approach.” The finance minister also acknowledged it would be unwise for fiscal policy to “pour fuel on the flames of inflation”
All of that raises the interesting question of what a fiscally prudent Liberal budget might look like – and even more key, what fiscal restraint on Ottawa’s part should look like.
For the most part, Ms. Freeland’s claim to restraint rests on the declining ratio of net federal debt to gross domestic product, the government’s supposed fiscal anchor.
The fall economic statement projected a narrow improvement, with debt-to-GDP edging down to 42.2 per cent in the coming fiscal year from 42.3 per cent in the current one. Still, that is down markedly from the pandemic peak of 49 per cent in fiscal 2021. And it’s enough to meet Ms. Freeland’s goal of a declining debt burden, by the smallest margin.
To paraphrase, that modest achievement has much to be modest about. For a start, the Liberals were handed huge revenue windfalls: $37.5-billion in the current fiscal year, rising to a cumulative $149.1-billion through to fiscal 2027.
The government will spend nearly half of that windfall (that figure excludes higher-than-projected debt servicing costs). Some of that increase results from the inflation indexing of federal benefits and is unavoidable. But the Liberals, as has been their habit since taking power in 2015, have chosen to use unexpected revenue to boost overall spending.
Some of that spending was defensible, most notably increased assistance to lower-income households that were being pinched by surging inflation. But the government could have found economies elsewhere – perhaps a hiring freeze? – that would have offset those outlays.
A different approach would have been to pocket most of the new revenue, redeploy some existing spending, drive down the deficit and reduce the upward pressure of fiscal policy on inflation. The failure to do so means monetary policy will need to do that much more work in taming inflation.
In essence, the Liberals’ disinclination to reduce federal spending means that Canadian families will have to cut their own budgets, in the face of higher interest costs.
So, the start of any genuine Liberal claim to fiscal rectitude would start with shedding that unfortunate habit. This would be a particularly auspicious time to do so, since the looming threat of recession could deflate what looks to be the somewhat rosy revenue projections from the fall.
That does not mean that the budget needs to be frozen in place. Indeed, the Liberals continue to make spending commitments, including this week’s announcement of incremental increases in federal health transfers.
Which brings us to another important test of the Liberals’ self-professed fiscal prudence: the government’s strategic spending review, aimed at identifying $6-billion in savings over five years, starting in fiscal 2025. By fiscal 2027, the government aims to unearth ongoing savings of $3-billion.
The start of this austerity drive has been underwhelming. A smaller spending review supposedly met its goal by finding $3.8-billion in savings from lower-than-expected spending on COVID-19 relief programs for businesses and individuals.
However, those savings were not part of any particular government action and occurred before the spending review was announced in April (although the Liberals were perhaps not fully aware of that fact when launching their review). Ms. Freeland’s first spending review was a phantom exercise.
The second one should not be. Ongoing savings of $3-billion would, for example, pay for three-quarters of added federal health transfers in fiscal 2027.
The bottom line is the bottom line. Will the Liberals stick to the path of deficit reduction laid out in the fall economic statement, which would see a small surplus emerge in five years? Or will they ramp up spending, and force the Bank of Canada to leave interest rates at painful levels for longer?
Once upon a time, the federal Liberals boasted that they were taking on debt so that Canadians would not have to. The 2023 version should be: we are cutting our spending, so you won’t have to, as much.