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Minister of Finance and Deputy Prime Minister Chrystia Freeland speaks to the media at the Hamilton Convention Centre, in Hamilton, Ont., during the second day of meetings at the Liberal Cabinet retreat, on Jan. 24.NICK IWANYSHYN/The Canadian Press

Finance Minister Chrystia Freeland says her 2023 budget will prioritize spending on health care and the green energy transition, while ensuring the government’s overall fiscal plan is sustainable during what is expected to be a challenging year.

Speaking with reporters on the sidelines of a cabinet retreat in Hamilton, Ms. Freeland acknowledged a slowing economy could leave the federal government with less tax revenue to spend.

“I think that’s the approach that governments should always take to putting together a budget: If there’s less fiscal room, you can do less,” she said. “There is still a lot of uncertainty in the world economy. And that means that we do need to continue to take a fiscally prudent approach.”

However, Ms. Freeland said Canadians also expect Ottawa to support health care and she described the shift to clean energy as “a once-in-a-generation moment” that Canada must seize.

“Those are significant fiscal pressures, and those are also issues that Canadians are looking to us to respond to,” she said. “So some challenging things to all do at the same time. And that’s the balance we’re going to have to find in the budget.”

Economic policy experts who provided confidential advice to the Liberal cabinet Tuesday said Ottawa should ensure new spending in the 2023 budget doesn’t undermine the Bank of Canada’s efforts to cool inflation.

The economy is expected to stall through the first half 2023 as the Bank of Canada’s aggressive interest-rate increases squeeze Canadians’ finances and act as a brake on consumer spending and business investment.

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So far, the impact of higher borrowing costs has mostly been felt in the housing market, while other parts of the economy have proven remarkably resilient. Unemployment is near a record low, and GDP growth is on track to exceed expectations through the fourth quarter of 2022.

That said, interest-rate increases work with a considerable lag. The Bank of Canada expects the economy to post near-zero growth in the coming quarters, putting it right on the edge of recession. Bay Street analysts expect the central bank to announce one more rate increase on Wednesday before hitting pause on further rate hikes.

The annual rate of inflation has been trending down, hitting 6.3 per cent in December from a high of 8.1 per cent in June, thanks in large part to falling gasoline prices. But this is still well above the central bank’s 2-per-cent target. And core inflation measures, which aim to capture underlying price pressure, remain stubbornly high even as they have begun to decelerate.

Former Bank of Canada senior deputy governor Carolyn Wilkins, along with Chief Statistician Anil Arora and University of British Columbia economics professor Kevin Milligan, spoke with reporters after their closed-door meeting with federal ministers earlier on Tuesday.

Both Ms. Wilkins and Prof. Milligan said that at a time when the Bank of Canada is aiming to tame inflation, it is important to avoid significant increases in federal spending.

Ms. Wilkins stressed the importance of “having a compatible fiscal and monetary policy stance that kind of work in the same direction of getting inflation back to target or at least don’t offset each other.”

Ms. Wilkins is now a senior research scholar at Princeton University and an external member of the Bank of England. She pointed to the example of Britain’s September mini-budget, which prompted a strong negative reaction from financial markets because its tax cuts were viewed as stimulative and inflationary. The British proposals were later withdrawn.

“You could just see how markets can react if it’s overdone. I think Canada is very far from that kind of situation. At the same time, we don’t want more interest-rate increases than are absolutely necessary to get back to where we need to go,” she said.

The date of the 2023 federal budget has not been announced. Budgets are typically tabled in March but are sometimes released in February or April.

In an interview with The Globe and Mail after his confidential presentation, Mr. Arora said he used the data that the census agency gathers to lay the table for the ministers about the economic and personal pressures facing Canadians.

He noted that while the economy has been moving at a “pretty good clip,” Canadians, especially those in low income brackets, single households or young adults, are feeling immense inflation pressures with larger proportions of their income going to basic necessities.

In the past few years he said food prices have gone up 17 per cent and overall housing costs have gone from 38 per cent of a person’s income to 50 per cent. That proportion is even worse for low-income people. “You’re starting to see not only an economic burden, you’re starting to see the mental angst,” Mr. Arora said, adding that while he doesn’t advise on policy, the data he presents can help shape it.

In a report released earlier this week, former Bank of Canada governor David Dodge warned that Ottawa’s most recent fiscal forecast – the Nov. 3 economic statement – now appears overly optimistic. He said the government needs to prepare for the possibility that Canada will face a significant recession in 2023 and that interest rates could remain high for longer than currently expected. That would force Ottawa to divert more money to borrowing costs, leaving less room for other priorities.

The fiscal forecast Ms. Freeland released in November projected a balanced budget by 2027-28, but it did not include expected spending on a new health care deal with the provinces or a complete package of new green energy programs to compete with recently announced policies in the United States.

Ms. Freeland said her 2022 budget and fall update were fiscally prudent documents that showed the government knows it should not “pour fuel on the flames of inflation.” She said government projections are based on an average of private-sector forecasts and the fall update specifically illustrated a scenario in which the economy underperforms expectations.

With a report from Mark Rendell

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