Upcoming federal budget—get ready for massive spending increase

As federal budget day draws near, the Trudeau government appears poised to ramp up expenditures considerably. The new confidence and supply agreement will let the Liberal government govern until 2025 as the Liberals have agreed to launch several initiatives supported by the NDP in exchange for support in the House of Commons.

These ostensibly will include a new public dental program costed by the Parliamentary Budget Officer at more than $2 billion in spending over the first two years of the program, and a national pharmacare plan. This will be on top of the government’s current spending plans for national day care. In addition, there appears to be growing demands that Ottawa increase defence spending given the Russian invasion of Ukraine to bolster our NATO role. And growing demand to address Canada’s lack of affordable housing. All of this, plus the perennial demands for more health-care spending despite the fact we are one of the top spenders globally yet still manage to underperform on key health-care indicators.

In the wake of the pandemic, which saw a federal budget deficit of $328 billion in 2020-21 followed by projected deficits of $145 billion and $58 billion for 2021-22 and 2022-23 respectively, the net federal debt will grow to $1.35 trillion. If Canada adds billions of dollars for new initiatives in health and social spending, and billions more to boost our defence spending to 2 per cent of GDP, it’s difficult to see how federal finances will improve in the foreseeable future. Of course, one might hope for an economic boom that enriches federal coffers beyond the dreams of avarice, allowing us to have it all and improve the finances, but the current state of the world economy does not seem amenable to such hopes.

Yet the prospect of economic growth rooted in the current disruption of commodity markets and rise in the price of Canadian natural resources may indeed be roaming the federal government’s current frame of mind. Indeed, some analysts suggest that rising commodity prices may allow us—using an economic metaphor—to have both more guns and more butter. A booming economy from the demand for Canadian oil and gas and agricultural products will generate rising income and spending that will generate substantial new revenues. You do not necessarily even need to raise tax rates as higher inflation alone will eventually move Canadians into higher income tax brackets and to pay higher amounts of GST. We could conceivably have it all—more guns, more butter, and down the road perhaps even fiscal balance.

Unfortunately, the guns and butter metaphor is not appropriate here. It’s used in first-year economics to illustrate resource scarcity and trade-offs—how more of one thing results in less of another once you reach the resource constraint of the economy based on given technology, efficiency and resource inputs. Once you reach the frontier of your production possibilities, consuming more butter comes at the expense of fewer guns and vice versa. Consuming guns and butter outside the frontier places you outside the existing set of production possibilities and in the long run can only be achieved if the economy grows to reach that point. Unfortunately, that requires productivity growth from increases in inputs or capital investment in new technology rather than more deficit financing or the fervent hope that increased resource rents will pay the bills. Our productivity growth, not to mention our business investment, has been lacklustre for decades. As for relying more on natural resource exports, well that’s certainly a new tune in Ottawa given previous discomfort with being a hewer of wood or drawer of water in the age of environmental concerns.

We are about to see an enormous ramping up of federal spending because of a belief that we can have both more guns and more butter without the growth in productivity required to fund it. More spending financed by a combination of deficits, rising government revenues as a result of inflation, visions of continuing low interest rates that allow for low debt service costs, and hopes of economic growth is not sustainable in the long term given the volatility of the current international economic environment. If government maintains this course, it may indeed be a prelude to raising taxes.