Freeland and Trudeau face fiscal test with upcoming federal budget

While the war in Ukraine has increased uncertainty around the world, particularly in energy markets, here at home we’re quickly approaching a critical test of the Trudeau government’s fiscal probity. Ottawa will likely have more revenue—perhaps considerably more—than recently forecast when the government tables its next budget, perhaps in late March. Finance Minister Freeland and Prime Minister Trudeau face a fiscal test—can they restrain their spending proclivities to improve federal finances given the unplanned showering of revenues?

All provinces who recently updated their finances reported marked improvements in revenues. The recent fall fiscal update from Ontario, for instance, indicated revenues would be $22.6 billion higher than forecast in last year’s budget. Alberta’s 2022 Budget expects revenues to be $18.0 billion higher in 2021-22 than originally budgeted last year, thanks largely to increases in resources revenues but also higher personal and business income tax revenue. Revenues are also up in British Columbia and Prince Edward Island, which both recently released their 2022 budgets.

While the situation in Europe remains volatile, higher oil and gas prices increase revenues to the provinces and Ottawa. And higher inflation, which Canadians are feeling at the pumps and the checkout line, also increases revenues to government. Unfortunately, the Trudeau government has a poor record with unexpected revenues, opting at every opportunity to increase spending rather than moving towards budget balance.

Consider fiscal 2018-19 and the decisions by then-finance minister Bill Morneau and Prime Minister Trudeau. As is normal, Ottawa presented a full budget in the spring and an economic and fiscal update in the fall. During the interim between the budget and the update, revenues were $5.5 billion higher (and federal debt costs $2.5 billion lower) than budgeted, resulting in a windfall of $8.0 billion.

If the government had simply continued to spend based on its plans released in the spring budget, it could have reduced the deficit from a planned $18.1 billion to roughly $10.0 billion. (Remember, these spending plans were not even one-year old.) Instead, it increased spending by exactly $8.0 billion and the deficit came in as originally budgeted—$18.1 billion. Despite an extra $8.0 billion in revenue, the Trudeau government wasn’t able to reduce the budgeted deficit by one dollar.

Not only has the Trudeau government, under both finance ministers Morneau and Freeland, demonstrated a proclivity for spending at the expense of making progress towards a balanced budget, but it seems uninterested in targeting assistance to Canadians in need, which would better control spending and the borrowing needed to finance it. For example, several recent analyses (published by the Fraser Institute) of the Canada Child Benefit (CCB), a hallmark reform of the Trudeau government, show that despite political rhetoric, increased CCB spending has largely benefited middle- and even some upper-income families rather than lower-income families.

Moreover, an analysis of COVID-related programs including CERB, CESB (CERB but for students), and onetime COVID payments to seniors, concluded that up to 27.4 per cent (or $81.6 billion) of the spending was poorly targeted and provided assistance to individuals and families with questionable need. Similarly, a recent Statistics Canada report found that large corporations were twice as likely as small businesses to receive the Canada Emergency Wage Subsidy (CEWS) despite the program being enacted to target assistance to small businesses.

It would not be surprising, of course, if Russian aggression in Ukraine requires Ottawa to increase overall defence spending. But these are the choices governments must make. Does Ottawa simply spend more money (again) and make no progress in balancing the budget, or does it look at current spending to find waste, duplication and savings so current spending plans accommodate increased defence spending?

In light of the revenue windfall many expect in the upcoming federal budget, if the Trudeau government adheres to the spending plan it presented in the 2021 fall update (which amounts to more than $420 billion next year), it could dramatically reduce the deficit and place Canada on a realistic path towards budget balance. However, such an approach requires spending restraint in the face of a windfall. This is a test for the relatively new finance minister and Trudeau government more broadly: to spend or not to spend.