It’s fiscal season in Ottawa, with the Liberal government already in the fray, trying to shape perceptions of the — er, fiscally prudent — spending plans that will emerge over the next few months.
“There is still a lot of uncertainty in the global economy,” Treasury Secretary Chrystia Freeland told reporters last month. “And that means we must continue to take a fiscally prudent approach.” The Treasury Secretary also acknowledged that it would be unwise for fiscal policy to “fuel the flames of inflation”.
All of this begs the interesting question of what a fiscally prudent Liberal budget might look like — and, more importantly, how fiscally prudent Ottawa might be. should look.
Ms. Freeland’s claim for restraint rests largely on the decline in the ratio of net federal debt to gross domestic product, the government’s perceived fiscal anchor.
The fall economic report predicted marginal improvement, with the debt-to-GDP ratio falling from 42.3% in the current fiscal year to 42.2% in the next fiscal year. But that’s well below the pandemic peak of 49% in fiscal 2021. And that’s enough to meet Ms. Freeland’s goal of reducing the debt burden by the smallest margin.
To put it bluntly: this modest achievement must be very modest. First, the Liberals have received huge revenue streams: $37.5 billion in the current fiscal year, which will grow to $149.1 billion by fiscal year 2027.
The government will spend almost half of this windfall (this figure excludes higher than expected debt servicing costs). Part of this increase results from the inflation indexation of federal benefits and is unavoidable. But the Liberals, as has been the norm since taking office in 2015, chose to use the windfall gains to increase overall spending.
Some of these expenditures were reasonable, including increased support for low-income households battered by rising inflation. But the government could have found savings elsewhere – perhaps a hiring freeze? – who would have compensated for these expenses.
Another approach would have been to pocket most of the new revenue, reallocate some of the existing spending, reduce the deficit, and ease the upward pressure on inflation from fiscal policy. Failure to do so means that monetary policy will have to do much more to control inflation.
Essentially, the Liberals’ reluctance to cut federal spending means Canadian families are having to cut their own budgets in the face of higher interest charges.
Thus, the beginning of a genuine liberal claim to fiscal rectitude would begin with breaking this annoying habit. This would be a particularly promising time as the looming recession could dent the somewhat optimistic fall sales forecast.
This does not mean that the budget should be frozen. Indeed, the Liberals continue to make spending commitments, including phased increases to federal health transfers announced this week.
That brings us to another key test of the Liberals’ self-proclaimed fiscal prudence: the government’s strategic spending review, which aims to identify savings of $6 billion over five years, starting in fiscal year 2025. By FY2027, the government plans to unveil another $3 billion in savings.
The start of this austerity course was not exactly exhilarating. A narrower spending review would have hit its target by finding $3.8 billion in savings from lower-than-expected spending on COVID-19 relief programs for businesses and individuals.
However, these cuts were not part of any specific government measure and came before the announcement of the April spending review (although the Liberals may not have been fully aware of this fact when they initiated their review). Ms. Freeland’s first spending review was a ghost exercise.
The second shouldn’t be. For example, ongoing savings of $3 billion would fund three-quarters of additional federal health transfers in fiscal year 2027.
The bottom line is the bottom line. Will the Liberals stick to the deficit reduction path outlined in the fall economic statement, which would produce a small surplus within five years? Or will they increase spending and force the Bank of Canada to keep interest rates at painful levels for longer?
Once upon a time, the federal Liberals bragged about going into debt so Canadians wouldn’t have to. The 2023 version should read: We’re cutting our expenses so you don’t have to.
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