Finance Minister Chrystia Freeland will present her budget soon, likely the week of March 18, the only week parliamentarians will meet in Ottawa in March. Should the federal government cut spending, as the CD Howe Institute economists suggest, or is Canada's fiscal situation completely healthy and sustainable, as the Desjardins economists say?
We may wonder whether, from a strategic perspective, the Trudeau government is not tempted to embark on a fiscal turnaround after eight years of deficits, debt and investments in costly programs, while the Conservatives, far ahead in the polls, are calling for more fiscal rigor.
At the same time, is there a real problem in Canada's public finances? Should we really be worried? Could it be that the Trudeau government's budget deficits actually lead to significant social progress?
According to Statistics Canada, the Gini coefficient fell by 7% from 2014 to 2021, meaning the level of inequality has fallen and government policies are there for something, particularly with the creation of the Canada Child Benefit, which has made this possible Household poverty rates are expected to fall from 12.9% in 2016 to 7.4% in 2021, Statistics Canada data shows.
Budget cuts?
Now many economists are concerned about the financial sustainability of the Canadian government. Since the Liberals came to power, a deficit of more than $550 billion has been calculated, due in large part, but not entirely, to the pandemic. Net debt rose from around $700 billion in 2015 to $1,300 billion today. Federal debt rose from 31% to 42% of GDP.
Economists Don Drummond, Alexandre Laurin and William BP Robson of the CD Howe Institute presented the budget they want to see in Ottawa on Wednesday. It's nothing compared to what we've seen in recent years. They immediately write that the fall 2023 government update lacks credibility and is unable to release amounts to reduce taxes and increase productivity in Canada.
They propose budget cuts to return to fiscal balance in 2027-2028. It's in three years! They recommended cuts of $11 billion in 2024-2025, $16 billion in the following two years and up to $21 billion in 2028-2029. Economists also determine new tax revenues.
Program spending increased from $264 billion in 2015-2016 to $339 billion in 2019-2020. The pandemic caused an explosion to 609 billion in 2020-2021. In 2028-2029 we will still be at 534 billion, representing average annual growth of 5.2% since 2019-2020 and 5.6% since 2015-2016.
According to figures from the Federal Economic Update, program spending increased from 12.9% of GDP in 2014-2015 to 17.3% of GDP in 2023-2024. ™Autumn. In fact, they are expected to rise to 17.8% next year. The cost of national debt is also rising, while interest rates have risen sharply since 2022.
The problem, economists say, is that economic growth is currently zero and will remain relatively weak in the coming years. And as interest rates rise, so does the burden of debt service. Next year we should reach 1.8% of GDP. It is becoming increasingly difficult for the Canadian government to aim for a balanced budget as structural deficits become apparent.
In addition to the cuts, the CD Howe Institute proposes raising the retirement age from 65 to 67 by 2050, increasing taxes on seniors and also increasing the GST to reduce it to 7% in 2025 and at the same time reduce taxes.
CD Howe believes that cutting corporate taxes would increase productivity. However, the organization says little about the basis for this claim. Canada has been reducing corporate taxes for over 25 years. The tax rate fell from 36% in 1980 to 15% in 2012. However, Canada's productivity levels remain below the OECD average and most G7 countries.
Research, innovation, science and productivity
The answer likely lies in significant reinvestment in science, research and innovation to get Canada back on track in terms of productivity, i.e. production per hour worked. In a study published last summer, TD wrote that Canada's productivity deficit is due to several factors:
“ineffective regulation and tax policy”;
“The high concentration of small businesses in production and employment. “Smaller companies generally export and invest less than large companies”;
“Investment in non-residential buildings, machinery and equipment and intellectual property has been inadequate since 2015”;
“Investment in research and development has continued to decline in Canada, while it has increased to varying degrees in all other G7 countries.”
TD notes that investment in research and development accounted for 1.7% of GDP in 2021, a figure more than 50% lower than that of the United States and lower than most other countries.
A few weeks before the budget is passed, several researchers are calling for massive government investments in science, research and innovation. In a letter published on Thursday, they denounce the fact that Canada has been experiencing a national decline in funding for scientific research for 20 years, while OECD countries tend to increase their research investments as a proportion of GDP.
Professors from several universities, on the initiative of Marc-Denis Rioux from the Department of Mathematics, Computer Science and Engineering at the University of Quebec in Rimouski (UQAR), affirm in a letter to the Federal Minister for Innovation François-Philippe Champagne: that from 2000 to 2022 the average research investments in the OECD countries increased from 2.12% of GDP to 2.72%. The United States spent 2.62% of GDP on research in 2000, while in 2022 it will spend 3.46% of GDP, an increase of almost 32%. In comparison, in Canada we went from 1.86% of our GDP in 2000 to 1.55% in 2022, a decrease of 16%.
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This is very worrying. Canada no longer invests enough in research. The observation is clear: we are missing the connection.
Even more worrying, they say, is that funding for basic research in Canada remains the poor cousin of research funding. […] Subjugating research funding to industry interests can not only limit innovation, but also lead to a crisis of public trust. Science is increasingly perceived as a task that serves private interests rather than the common good.
We have lost an entire generation of researchers in the period from the early 2000s to today due to a lack of career opportunities in research. This particularly applies to areas of basic research where financing is extremely difficult.
When we compare ourselves, we comfort ourselves
Desjardins economists decided to look at the situation more broadly and make comparisons with other countries. Canada remains one of the cleanest dirty shirts in the household laundry basket, writes economist Randall Bartlett in an economic note published Thursday. This image expresses: Yes, governments have to deal with serial deficits, but no, the situation is no worse in Canada than anywhere else. It's even better.
The IMF expects the annual deficits of all public administrations in Canada over the next five years to be the lowest among the G7 countries, which include Australia, New Zealand and Spain, writes Desjardins.
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The Canadian government's deficit as a percentage of GDP would be the lowest among G7 countries for fiscal year 2023-2024.
Photo: Desjardins
Canada remains one of the least indebted countries among advanced economies. Desjardins speaks of fiscal outperformance to describe the relative state of the country's public finances. However, we rarely boast about it within our borders, even if it is recognized worldwide. However, it is an important point that more people should know because a shared understanding of a set of facts will help them determine whether policy is consistent with budget. Canada's policies are heading in the right direction. Otherwise, they risk basing their decisions and opinions on myths.
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Canada's net debt is very low compared to the nine other selected countries, namely the G7 countries, which are joined by Australia, New Zealand and Spain.
Photo: Desjardins
Nevertheless, Canada should not take anything for granted, writes the Desjardins economist and also calls on the Trudeau government to better control its spending. The federal government must make a credible commitment to reduce its debt ratio by reducing its spending, particularly those under its control, such as operating expenses. In addition, policies should attach great importance to productivity and wealth creation to ensure the long-term sustainability of public finances.
The political game
It is clear that the Trudeau government fundamentally believes in the importance of investing in social services and social protection to improve the situation of households. Pledges that, while costly, improve Canadians' quality of life include dental care, low-cost daycare and the Canada Child Benefit.
There is also an urgent need for action in the housing sector and the ever-increasing problem of homelessness. Here too, additional federal investments could be necessary.
Today the government must respond to a request from the New Democratic Party (NDP), with whom it reached a parliamentary agreement calling for universal drug coverage. According to the parliamentary budget officer, this program could cost the state about $13 billion, but it could provide savings for citizens, businesses and provinces. About 20% of Canadians do not have insurance for their medications.
What will the Trudeau government, falling in the polls, do after eight years in power? Will it stay true to its DNA and focus on investments that improve the quality of life for Canadians? Or will he be tempted to initiate a shift towards fiscal discipline? Be continued…