Canada's federal budget’s scale of spending and debt reveal a government lacking self-control


Time and time again, Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland have emphasized the importance of being fiscally responsible with federal finances. Unfortunately, this year’s federal budget ensures once again their rhetoric rings hollow due to their ongoing mismanagement of federal finances.

This mismanagement is rooted in the government’s insatiable appetite for new and expanded programs or services, which has endured for nine years and will continue for the foreseeable future. The budget introduces billions of dollars in additional spending for a national school food program, housing initiatives, and artificial intelligence. As such, program spending (total spending minus debt interest costs) is now expected to be $77.2 billion higher over the next four years than the government forecast last spring.

In 2024/25 alone, federal program spending will reach a projected $483.6 billion—an increase of $16.1 billion compared to the previous budget’s estimates. On a per-person inflation-adjusted basis, federal program spending is forecasted to reach $11,901, which is approximately 28.0 percent higher than during the final full year of Stephen Harper’s tenure as prime minister (2014/15). The Trudeau government has already recorded the five (2018 to 2022) highest levels of federal program spending per person in Canadian history (inflation-adjusted), and budget projections suggest it’s now on track to possess the eight highest levels of per-person spending by the end of its term next autumn.

This is despite recent polling data that shows the majority of Canadians (59 percent) think the Trudeau government is spending too much. Nearly two-thirds (64 percent) of Canadians are also concerned about the size of the federal deficit.

As it has done nine times before, the Trudeau government will borrow to fund some of its spending spree, resulting in a projected budget deficit of $39.8 billion this year, which is $4.8 billion higher than previously forecasted. And it doesn’t intend to stop borrowing, with annual deficits exceeding $20 billion planned for the subsequent four years. This represents a notable increase in deficits compared to what was expected in last year’s budget. Simply put, there’s no plan for a return to balanced budgets any time soon. As a result, federal debt (net debt minus non-financial assets) is expected to climb $156.2 billion from now until April 2029.

To make matters worse, the government is also increasing the capital gains inclusion tax rate from 50.0 percent to 66.6 percent for capital gains realized above $250,000. This will act as a huge disincentive for individuals and businesses to invest in Canada at a time when the country already struggles to attract the very investment we need to improve productivity, economic growth, and living standards. Businesses and individuals will now simply invest their capital elsewhere.

There’s a large body of research that finds low or no capital gains taxes increase the supply and lower the cost of capital for new and growing firms, leading to higher levels of entrepreneurship, economic growth, and job creation—precisely what Canada needs more of today and in the future.

While the government did boast about its ability to hold the 2023/24 deficit at $40.0 billion, this had little to do with responsible fiscal management. Instead, the government enjoyed higher-than-anticipated revenues of $8.3 billion but repeated its all too frequent and ill-advised approach of spending that money and wiping out any chance to reduce the deficit.

Growing federal debt leads to higher debt interest costs, all else equal, which eat up taxpayer dollars that could otherwise have provided services or tax relief for Canadians. For context, the government now spends more ($54.1 billion) on debt interest as on healthcare transfers to the provinces ($52.1 billion). Accumulating debt today also increases the tax burden on future generations of Canadians who are ultimately responsible for paying off this debt. Research suggests this effect could be disproportionate, with future generations needing to pay back a dollar borrowed today with more than one dollar in future taxes.

But again, it didn’t have to be this way. As we pointed out before the budget, had the government simply limited the growth in annual program spending to 0.3 percent for two years, it could have balanced the budget by 2026/27 and avoided significant debt accumulation.

Instead, the government chose to increase annual program spending by an average of 4.4 percent over the next two years and kick the debt problem down the road for another government to solve. Simply put, the government’s fiscal strategy is not all that different from an overzealous child that eats all their Halloween candy in one night even though they fully understand it won’t end well.

Yet for all this spending and debt, living standards have not improved for Canadians. Inflation-adjusted GDP per person was lower at the end of 2023 than it was nine years prior in 2014. And going forward, the OECD predicts Canada will record the lowest growth rates in per-person GDP up to 2060 of any industrialized country—meaning countries such as New Zealand, Italy, Korea, Turkey, and Estonia would all surpass Canada with higher living standards.

The combination of tax hikes and the scale of spending and debt in this year’s federal budget demonstrates the Trudeau government has no interest in being fiscally responsible or improving living standards for Canadians. Instead of showing restraint, the government chose to repeat its mistakes and lead federal finances down an increasingly perilous path.

https://www.fraserinstitute.org/blogs/federal-budgets-scale-of-spending-and-debt-reveal-a-government-lacking-self-control


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