Trudeau government keeps to activist agenda in tax-and-spend budget

Finance Minister Chrystia Freeland tabled the 2024 budget Tuesday, with big spending to increase Canada’s housing supply. The only thing keeping the deficit trajectory in check were new taxes, including $19 billion over five years in new capital gains levies on wealthy individuals and corporations – underscoring the extent to which we have fully entered a populist moment in Canadian politics, Theo Argitis writes. 

THE CANADIAN PRESS/Adrian Wyld

Deputy Prime Minister and Minister of Finance Chrystia Freeland rises to present the federal budget in the House of Commons in Ottawa on Tuesday, April 16, 2024. The Liberal government has already unveiled significant planks of the budget, including billions of dollars to build more homes, expand child care and beef up the military.

Good news: If you like spending and taxes, Canada’s 2024 federal budget is the fiscal plan for you.

Just kidding (sort of).

There are a lot of good things in this fiscal plan, and government has provided support for many worthwhile initiatives, including much needed funding for housing, defence, research and AI. 

But there were more than 200 new measures in the budget in Chrystia Freeland’s budget tabled Tuesday, worth more than $50 billion in new spending at a time when the Bank of Canada is working hard to quell inflationary pressures. Program spending will rise by 6.7 per cent this year, which is almost twice the pace of economic growth.

The only thing keeping the deficit trajectory in check were new taxes, including $19 billion over five years in new capital gains levies on wealthy individuals and corporations – underscoring the extent to which we have fully entered a populist moment in Canadian politics. 

Prime Minister Justin Trudeau runs an activist government. And there’s enough of a record now to believe it will probably remain activist until one of two things happens: there’s a sharp deterioration in the economic outlook, or the Liberals lose an election. Neither of those outcomes seem imminent, so let the activism reign.

The full budget can be found here, and there are more links to news reports below in the newsletter.

Here are some numbers:

Deficits

When looking at Canada’s fiscal picture, I suggest discounting the Liberal government’s medium-term projections, which always show improving debt dynamics and a downward deficit trajectory that approaches balance and then fails to materialize.

I call it the Bill Parcells rule (named after the former New York Giants coach): You are what your record says you are.

The government sees the deficit averaging 1.3 per cent over the next two years, which is a pretty credible assumption. Between 2017 and 2022, Trudeau ran deficits averaging 1.4 per cent of GDP when adjusted for swings in economic activity. So that appears to be the steady state deficit position for this government.

Finance Minister Chrystia Freeland is still projecting the deficit will drop below one per cent by 2026, but that’s beyond the horizon of the next election and would require a rewiring of the government’s budget ethos to be attained.

In sum, the absolute deficit numbers are pretty much in line with the government’s previous projections in October of about $40 billion annually over the next two years, with a slight deterioration in the trajectory from 2026 on – which we said we are discounting. 

Spending 

Total expenses will hit $538 billion this year, or 17.9 per cent of GDP. Outside of the pandemic years, that’s the highest since 1996, when debt service payments were a much bigger item than today. Excluding debt charges, spending is projected to be at 16.1 per cent of GDP this year -  a level not seen since the 1980s outside of recessions.

To be sure, spending levels have been higher – but only in the 1970s and 1980s which are not exactly high water-mark years for fiscal prudence.

One can argue that there are good reasons that spending needs to be elevated, such as the need to finance the climate transition. But it’s tough to argue this isn’t a big spending government. 

It's a similar story for revenue, which will hit 16.6 per cent of GDP this year. That’s the highest since 2000.

That’s supported by the capital gains measure which the government projects will generate $4.9 billion in additional revenue this year. 

Economic assumptions

The budget is based on a very sanguine outlook – which is a risk to the fiscal trajectory.

The economy is expected to grow at an average pace of about four per cent over the next five years, with no recession on the horizon. That’s pretty much in line with recent historical averages for growth, but it implies an outlook with more solid productivity gains than we’ve seen recently.

Assumptions on interest rates are pretty benign, with 10-year bond yields projected to average around 3.3 per cent over the budget horizon. That is below current market levels of 3.7 per cent. 

Just a reminder, the economic assumptions used by the finance department are based off of private-sector forecasts. Freeland can’t be faulted for projecting strong economic numbers.

But economists have a poor track record of projecting dramatic turning points like recessions, and the government doesn’t need to be a passive taker of their forecasts.

Freeland is the first finance minister in decades not to use fiscal cushions in her projections, just in case the economists are wrong. 

Even with a relatively benign outlook for interest rates, by the way, Canada’s debt service costs are surging due to the debt that has been accumulated in recent years.

Interest on debt is projected to be $54 billion this year, more than double debt costs paid out in Trudeau’s first budget.