Finance Minister Chrystia Freeland announced billions in spending on Tuesday, in a housing-focused fall economic statement that also set a new cap on the size of future deficits, pledging to keep them at no larger than 1 per cent of gross domestic product.
The target implies maximum annual deficits of around $32-billion when the rule takes effect in the 2026-27 fiscal year.
Ms. Freeland touted the economic update as a “responsible fiscal plan” that limits spending growth in order to avoid fuelling inflation. But since March, the government has added $20.8-billion in planned new spending over the next six years – much of it announced before Tuesday – leading some economists to question how serious the government is about fiscal restraint.
The update forecasts five years of deficits that would be, on average, about $7-billion a year higher than projected in the March budget. It sees these deficits getting smaller over time, but there are no plans to return to a balanced budget.
Amid high interest rates and slowing economic growth, the government’s new deficit cap serves as a message to investors, the Bank of Canada and even Ms. Freeland’s cabinet colleagues that Ottawa is trying to keep a lid on spending. Many economists, including top officials at the central bank, have warned that growth in government spending is adding to inflation.
The deficit cap leaves relatively little room for additional spending on things such as the national pharmacare program advocated for by the NDP, or on other items the government may wish to announce in the run-up to the next federal election, currently scheduled for 2025.
It could also be a difficult promise to keep if interest rates move higher, or if economic growth slows more than expected. That could mean cutting spending during a slowdown.
The update contains a package of measures related to housing and competition reform that the government had already signalled were coming. It also contains new details on the rollout of big-ticket climate policies, but previously unannounced spending items were limited.
Among the new housing measures announced Tuesday were $15-billion in loans for rental apartment construction, and $1-billion in investment, over three years, to support non-profit, co-op and public housing providers.
The government also announced a Canadian Mortgage Charter that will spell out the rights consumers have when they are renegotiating mortgages. And it pledged to deny income tax deductions on short-term rentals – such as Airbnbs – in areas where they have been prohibited by provinces or municipalities.
Housing affordability has become a major political liability for the government, and it’s getting worse. The annual rate of inflation fell to 3.1 per cent in October, Statistics Canada reported Tuesday, but rent was up 8.2 per cent and mortgage-interest costs were up 30.5 per cent, year-over-year, making shelter costs the biggest driver of overall inflation.
At $40-billion, the government’s projected deficit for the current fiscal year is essentially unchanged from the March budget. The deficit is expected to decline to $38.4-billion next year, and reach $18.4-billion by the 2028-29 fiscal year.
The larger expected deficits, compared with the March projection, are a result of slowing revenue growth and higher debt-servicing costs. Interest payments on government debt, as a percentage of revenue, are expected to rise slightly above 10 per cent in the coming years. That would put the debt-service ratio above the threshold recommended by former Bank of Canada governor David Dodge, beyond which debt sustainability becomes a concern.
The government now expects to spend roughly $30-billion more servicing its debt over the next five years – including the current fiscal year – compared with the March budget’s projections.
The Liberal government has faced pressure to set a more aggressive fiscal anchor – a target that guides federal spending. In recent years, the government has abandoned one such anchor, a plan to balance the books by a set year.
More recently, the government’s target has been to keep the net debt-to-GDP ratio on a declining trend. That effort was disrupted by the pandemic, but the government says the goal remains.
Tuesday’s update provides an expanded definition of the government’s fiscal target. It says Ottawa will keep the size of this year’s deficit at or below the $40.1-billion that had been forecast in the March budget. It will also lower the debt-to-GDP ratio after the 2024-25 fiscal year and keep deficits below 1 per cent of GDP in 2026-27 and future years.
Overall federal debt compared to the size of the economy was revised down slightly for the current fiscal year in Tuesday’s economic statement, from 43.5 per cent to 42.4 per cent. That’s a result of better-than-expected tax revenues last year. But the debt-to-GDP ratio is expected to tick up slightly next fiscal year before declining again – stretching the government’s previous commitment to keeping the ratio on a downward track.
In recent weeks, Bank of Canada Governor Tiff Macklem has noted that federal and provincial government spending is working at cross purposes to the bank’s efforts to cool inflation. Economists had urged Ms. Freeland to deliver a narrowly focused update.
Former parliamentary budget officer Kevin Page, who is now president and chief executive officer of the University of Ottawa’s Institute of Fiscal Studies and Democracy, said the minister’s pledge to keep future deficits below 1 per cent of GDP appears aimed at addressing Mr. Macklem’s concerns.
“To hold the deficit to something like that is definitely a sign of fiscal restraint,” he said. “One per cent, in this environment, is a reasonable number.”
Other economists aren’t so sure. Rebekah Young, head of inclusion and resilience economics at Bank of Nova Scotia, said that the government has blown though fiscal anchors before.
“We’ve seen lots of guardrails and fiscal anchors come and go over the last couple of years,” she said, noting that the government is once again pushing out its timeline for putting debt-to-GDP on a downward track.
Ms. Freeland told reporters Tuesday that “the single biggest challenge right now” is finding the balance between necessary investments and delivering a fiscally responsible economic plan.
“We know we have to find that balance. And we have found that balance in the document we’re publishing today,” she said.
Many of the most significant items accounted for in Tuesday’s economic update had already been announced. Those include billions of dollars in subsidies for two electric-vehicle battery manufacturing plants, and an enhanced GST rebate for rental home construction. But there were a number of smaller changes and announcements, alongside the other housing measures.
The government says it will crack down on “junk fees,” including the costs Canadians pay for international wireless roaming charges. The update lifts the federal sales tax on counselling and psychotherapy services. It also extends Employment Insurance to parents who adopt.
The government is considering offering loan guarantees to Indigenous-owned businesses. It said it would have more to announce on this in the spring budget.
Efforts to find internal savings have been expanded slightly. In comparison to targets set in the March budget, the government now plans to find an additional $691-million a year by 2026-27.
NDP Leader Jagmeet Singh criticized the update, but gave no indication that it would cause his party to abandon its agreement to support the Liberals.
“At a time when we’re talking about one of the biggest challenges that our country has ever faced, and the government has been talking about a wartime effort to deal with the housing crisis, there is nowhere near that level of effort,” Mr. Singh said.
Conservative Leader Pierre Poilievre said the update does not address the pressures Canadian homeowners are facing as they renew mortgages at much higher rates. Speaking in the House of Commons, he also said the update repeats a pattern in which the Liberal government makes big promises on housing, but fails to deliver.
“Those houses cannot be characterized with any adjective other than non-existent. They don’t exist,” he said.
With a report from Ian Bailey