Treasury Secretary Chrystia Freeland has pledged to achieve all of this over the past few weeks while pledging to maintain fiscal discipline.
Federal Finance Minister Chrystia Freeland
Photo: The Canadian Press/Nick Iwanyshyn
However, achieving this balance should not be easy. The slowdown in Canada’s economy could weigh on government coffers.
It’s going to be very difficult for the federal government, said Randall Bartlett, senior director of Canada’s economic component at Desjardins.
Liberals are expected to invest heavily in Canada’s clean energy transition with the goal of keeping Canada competitive with the United States by introducing aggressive policies of its own.
Food prices have risen sharply in the country.
Photo: Radio Canada / Ivanoh Demers
The Reducing Inflation Act, passed by the US Congress in August, invests nearly $400 billion in multiple sectors of activity, from critical minerals to manufacturing batteries, electric vehicles and clean power, including hydrogen.
Ottawa has also pledged big bucks for health care; The federal government recently signed 10-year funding agreements with the states for health transfers and these expenditures are expected to be included in the federal budget.
Because the cost of living remains a major economic concern for many Canadians, Liberals said the budget will include new affordability measures.
“In the coming weeks, our government will provide additional targeted inflation support to our most vulnerable friends and neighbors for those Canadians who feel the impact of rising prices most severely. »
— A quote from Federal Finance Minister Chrystia Freeland
But Bartlett warns that the federal government must balance its key spending priorities with an uncertain economic outlook.
Many economists are predicting that Canada could slip into recession this year as high interest rates weigh on the economy. Since March 2022, the Bank of Canada has aggressively raised interest rates to combat high inflation.
As global price pressures ease and interest rates dampen economy spending, inflation slows. Annual inflation in Canada fell to 5.2% in February from 8.1% last summer.
Even if inflation becomes less of a problem, the slowing economy means less government revenue to fund spending.
According to a Desjardins report, the new spending measures alone would not necessarily put federal finances on an unsustainable path. But if significant new spending coincides with a worse-than-expected economic downturn, it could pose challenges for the federal government, the report said.
“Planning for an optimistic future and spending accordingly now could lead to very difficult circumstances in the future. »
— A quote from Randall Bartlett, senior director of the Canadian Economy component at Desjardins
The federal government also runs the risk of fueling inflation by overspending, making it harder for the Bank of Canada to keep inflation under control. Ms Freeland has repeatedly said she has no intention of doing so, stressing that the federal government cannot compensate all Canadians for the price increase.
Bartlett said the federal government has done a good job so far in balancing the need to help low-income Canadians without adding fuel to the fire.
My concern is that if they continue this, there will be additional spending on other initiatives […] it will not only make the work of the Bank of Canada more difficult. This will only increase the deficit at a time when the economic outlook is very uncertain, he stressed.
It is also unclear how the federal government will approach tax policy in this year’s budget.
Some experts have suggested that increasing tax revenues could be part of the solution to stabilizing federal finances. A shadow budget prepared for the CD Howe Institute, an economic think tank, recommended raising the GST rate.
The Desjardins expert concedes that raising the goods and services tax (GST) could be difficult for Canadians, especially given that the federal government is investing heavily in some of its key investment areas, such as: B. its national housing strategy, has achieved mixed results.
If we continue to see increased spending, and that requires tax hikes to pay for it, the public will scrutinize more closely whether we’re getting our money’s worth, argues Randall Bartlett.
Politically, the Liberals also have to contend with the New Democrats’ priorities, set out in the Confidence Agreement between the party and the Liberals. He agreed to support the minority government on key votes through 2025, including on federal budgets, in exchange for action on shared priorities.
In the upcoming budget, NDP leader Jagmeet Singh wants the government to extend by six months the GST rebate that was introduced last fall and temporarily doubled the amount received.
Mr Singh is also calling for federal funding for school meals.
As part of the deal between the two parties, Liberals have already agreed to create a federally funded and administered dental program this year to replace the dental benefit introduced in the fall for children from low-income families.
The deal also commits Justin Trudeau’s Liberals to passing national pharmacare legislation by the end of 2023, although there’s no sign of progress on that yet.