Throne speech ignores realities of federal finances

In the recent throne speech, the federal government announced that its short-term priorities include increasing spending on government programs and reducing taxes for Canadians. Worryingly, these priorities will be financed entirely by new borrowing—resulting in a larger deficit—and increase the risk to federal finances as the possibility of a recession in 2020 looms.

During the fall federal election, the Liberal Party promised to introduce a host of new spending and revenue measures. On aggregate, the party expected these changes would produce a $27.4 billion deficit in 2020/21—a substantial increase compared to the previous year.

The Trudeau government, now a minority, reaffirmed its platform commitment to gradually increase the amount of money Canadians can earn before paying taxes (known as the basic personal exemption) to $15,000. The government has chosen to frame this policy as a tax reduction for the middle class even though it reduces the amount of personal income taxes paid by all taxpayers. The Liberals have indicated, however, they will offset this reduction for high-income earners so that only low- and middle-income earners will receive a small tax reduction.

Again, critically, these “tax cuts” will be financed exclusively through borrowing (i.e. deficits), which means the government will incur more debt to be paid back at a later date. In other words, taxes will not actually be cut, they will be deferred.

The federal government is also promising to boost spending for the Canada Child Benefit (CCB) program, which provides payments to parents. Expanding the program comes with an expected price tag of $4.1 billion over the next four years. Just like the tax reduction plan, this spending increase will be financed by borrowing money. Crucially, since the debt accumulated must eventually be repaid through higher taxes, today’s Canadian families will enjoy benefits that future families will pay for (and likely not enjoy themselves).

Put simply, the federal government is asking younger generations to bear the burden of this increase in debt —projected to reach a staggering $787.4 billion by 2024/25 (even before these policy changes)— and foot the bill of repayment through higher taxes in the future.

This news is particularly worrying as signs of recession continue to mount, which would immediately and directly increase the size of the federal deficit and thus overall debt.

For example, Statistics Canada’s monthly labour force survey concluded that Canada lost 71,000 jobs in November. The national unemployment rate rose to 5.9 per cent, compared to 5.5 per cent in October, the biggest one-month jump since the 2009 recession.

In addition to the dismal employment report released Friday, Canada’s major banks recently increased their loan-loss provisions—the amount of money they set aside for unpaid loans. A sign they expect increasing financial strain in the economy. This news comes in addition to several other worrying signs including ongoing trade tensions, a softening U.S. economy and depressed business investment.

As we’ve explained previously, a recession would automatically worsen the state of federal finances because the government collects less revenue and spends more, as incomes decline and more Canadians receive financial assistance (such as Employment Insurance) from Ottawa. During a recession the government also typically introduces additional spending in an attempt to stimulate the weakened economy.

The federal government must take the risk of recession seriously and hold discretionary spending to a minimum, otherwise it risks a serious deterioration in federal finances in 2020 that will likely take years to work out.