Federal budget lacks realistic recovery plan despite all the red ink

Today, the Trudeau government tabled the federal budget for the 2021/22 fiscal year. As expected, the pages were covered in red ink, with the government forecasting a $154.7 billion deficit this year. Unfortunately, the budget also projects high levels of spending and borrowing for years to come with no credible long-term strategy for balancing the budget or economic growth.

Budget 2021 included several new spending items such as a three-year stimulus plan and a $30 billion national daycare strategy over a five-year period. While much of the stimulus spending is temporary in nature, national daycare represents a permanent program that will substantially increase government spending moving forward and add to the federal debt.

The budget projects 2021/22 federal government program spending will reach $475.6 billion (excluding net actuarial losses), an increase of 40.5 per cent from 2019/20 levels before COVID and the recession. Federal program spending is forecasted to reach $12,697 per person, the second-highest level (inflation-adjusted) in Canadian history. To put this number in context, per-person spending (inflation-adjusted) was $9,153 during the 2009 recession.

The pronounced increase in spending compared to November’s projections also demonstrates the Trudeau government’s repeated inability to control spending. Revenue forecasts for 2021/22 indicate an increase of $19.2 billion over the last five months. Faced with this news, the government chose to spend $54.4 billion more, completely wiping out any gain from higher than expected revenue. This represents a familiar trend, as the Trudeau government has frequently offset higher-than-expected revenues with new spending since taking office.

To put these numbers into perspective, an increase in the GST to 10 per cent from its current 5 per cent would not be sufficient to pay for $54.4 billion in new spending.

While emergency spending was necessary to deal with the fallout of the pandemic, COVID-related spending only constitutes a relatively small portion of program spending this year. Indeed, of the $12,697 in spending per person, only 12 per cent will be spent on measures directly related to COVID. In other words, the vast majority of spending has little or nothing to do with the pandemic.

In addition to this year’s deficit, Budget 2021 also forecasts deficits for the remainder of the fiscal plan, which ends in 2025/26. All these deficits mean substantially more debt. By the end of the fiscal period covered by the budget, Ottawa will have run 18 consecutive deficits and net debt will climb to $1.5 trillion.

This year, the federal debt-to-GDP ratio (a good measure of debt sustainability) will also reach the highest level since 1999 at 51.2 per cent. Moreover, the Trudeau government does not plan to return to balanced budgets any time despite a recent poll showing eight in 10 Canadians desire putting an end to red ink in the near future.

Economic research shows more government debt results in slower economic growth, as it increases uncertainty for households and investors, and imposes the cost of current spending on future taxpayers. In other words, growing government debt will harm the economy and result in higher taxes in the future.

Another consequence is that Canadians must pay interest on the federal debt. Growing debt (all else equal) means that more tax dollars go to pay interest on the debt, which leaves less money for important items such as health care, social services and/or tax relief in the future.

Budget 2021 also lacks an effective strategy for economic recovery. While there are several big ticket items, such as stimulus and national daycare, all these measures are expensive and empirical research shows that stimulus in particular is unlikely to be effective at jumpstarting the economy.

To strengthen the Canadian economy and ensure long-term prosperity, the Trudeau government could have instead reduced taxes on personal income, businesses and capital gains to help incentivize entrepreneurship and private business investment. For instance, a recent study estimated that the federal government could help create 110,000 private-sector jobs if it reduced the top marginal income tax rate from 33 per cent to its previous level of 29 per cent.

This year’s federal budget was full of new spending items and red ink for years to come. Unfortunately, little concern was shown for the long-term health of federal finances and long-term sustainable economic growth.