Any credible plan to fix federal finances must address pre-COVID spending

The Trudeau government’s recent “snapshot” of federal finances estimated the deficit at a whopping $343 billion. Critics were quick to point out that the snapshot offered no plan to rein in spending to move towards a balanced budget, yet many failed to recognize that the federal government’s spending problem started long before the crisis, and indeed, any credible plan must assess Trudeau’s record spending level, pre-COVID.

Consider that before the pandemic, federal program spending (total spending minus interest costs) was expected to reach $9,306 per person in 2020—that’s the highest point in Canadian history (inflation-adjusted) and 6.0 per cent higher than during the 2009 recession. In fact, the Trudeau government recorded the three highest levels of per-person program spending in Canada’s history in 2018, 2019 and 2020 (again, pre-COVID).

In total, federal program spending (excluding interest costs) increased by $69.1 billion between 2015 and 2019, which is before the onset of the COVID crisis and recession. That’s a 27.2 per cent increase in nominal terms in just four years.

As a result, persistent deficits became the norm even before the recession. Indeed, the federal government was on track to accumulate deficits totalling more than $109 billion by 2020/21 (since 2015/16).

To truly get federal finances on a more sustainable path, the Trudeau government must therefore understand how it arrived at its record level of spending before COVID.

A recent study found that five spending areas (out of a total of 34) account for almost two-thirds of the spending growth between 2015 and 2019: Indigenous spending, children’s benefits, seniors’ benefits, national defense and the Canada Health Transfer.

As shown in the chart below, Indigenous and Northern Affairs represented the largest share of the change in federal program spending representing 15.4 per cent ($10.7 billion) of the total increase over the period. Children’s Benefits ranked second, accounting for 13.9 per cent ($9.6 billion) of the growth in federal program spending.

The federal government committed to increase spending in both these areas in its 2015 election campaign. Indeed, Trudeau promised to increase spending on Indigenous programs and introduce the Canada Child Benefit, which replaced and expanded two existing programs—the Canada Child Tax Benefit and Universal Child Care Benefit. Put simply, the two largest areas of growth were essentially discretionary spending decisions by the federal government.

Spending on seniors’ benefits—namely, Old Age Security and the Guaranteed Income Supplement—which represented 13.4 per cent ($9.3 billion) of the total growth in spending was largely driven by an aging population. Similarly, spending on the Canada Health Transfer, which accounted for 9.3 per cent ($6.5 billion) of the total increase, is determined by an existing formula and was not a discretionary spending decision. Finally, national defense represented 11.8 per cent ($8.1 billion) of the total growth, this increase may relate to Canada trying to uphold its NATO commitments.

So while the spending response to COVID is extraordinary due to unprecedented circumstances, it amplifies a broader trend over the past four years. A plan to reel in federal spending cannot overlook this fact, on the contrary, the federal government’s spending decisions pre-COVID must be central to any plan to move towards a balanced budget.