COVID-19 isn’t the only reason for our mega-deficit

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Appeared in the Financial Post, July 8, 2020

Today, the Trudeau government presents a “snapshot” of federal finances that’s likely to blame this year’s historic federal deficit on COVID-19 and the recession. But that’s only part of the story. The federal government shouldn’t be allowed to escape responsibility for its deficit-prone spending and borrowing decisions pre-COVID and recession.

According to the Parliamentary Budget Officer (PBO), this year’s deficit will exceed $250 billion, representing almost 12 per cent of Canada’s economy. In other words, the federal government plans to borrow the equivalent of 12 per cent of the total value of all goods and services produced in Canada this year—and to do so with the national debt approaching $1 trillion.

We did not reach this extraordinary level of borrowing due solely to COVID-19 and the recession. In reality, as outlined in a recent study, Ottawa’s spending and borrowing problems pre-date the current crisis. Had the Trudeau government followed the fiscal policies of the Chrétien government and run small surpluses we would have entered the recession with roughly $95 billion less in federal debt.

Before the pandemic, federal program spending (total spending minus interest costs) was budgeted to reach $9,306 per person in 2020—the highest level in Canadian history (adjusted for inflation). This was 3.2 per cent higher than the previous record high, established in 2019, and 6.0 per cent higher than peak spending during the last recession in 2009.

The current government has consistently demonstrated its proclivity for spending regardless of the effects on the deficit or overall debt. In the fall of 2018, for instance, $5.5 billion in higher-than-expected revenues and $2.5 billion in lower-than-budgeted interest costs generated an unexpected budget windfall of $8.0 billion. But, rather than simply stick to the spending planned in the spring budget, the government hastily increased outlays by $8.0 billion, spending all of the found money.

Consider also that, pre-pandemic, Prime Minister Trudeau’s government was one of only three in Canadian history to accumulate federal per-person debt outside of war or recession. The other two were led by Sir Mackenzie Bowell in 1895 and Sir John Abbott in 1891.

Blaming the deterioration of Canada’s government finances entirely on COVID and the recession carries the real risk that the government will take no corrective actions in the near term to restore some semblance of sustainable finances and thus send the country off onto a path similar to the one it followed in the 1970s to 1990s, which led it to the brink of a currency and debt crisis.

Understanding how the country arrived at the deficit-financed level of spending pre-recession is key to establishing a plan to restore sustainability in Ottawa’s finances. In total, federal program spending increased by $69.1 billion between 2015 and 2019, before the onset of COVID and recession. Even after adjusting for inflation, the rise in program spending was still sizeable, at $50.2 billion, representing growth of 18.4 per cent.

The study analyzed 34 categories of federal spending, covering direct spending, transfers to people and transfers to other levels of government. Just five areas account for almost two-thirds of the increase in spending since 2015.

Spending on programs for Indigenous people accounted for 15.4 per cent of total growth, while expanded Children’s Benefits were another 13.9 per cent. These discretionary increases were largely based on campaign commitments the Liberals made in 2015.

In contrast, increases in seniors’ benefits and the Canada Health Transfer (CHT) were much less discretionary. The CHT, for instance, is based on a formula. And seniors’ benefits are largely driven by the size of the eligible seniors’ population, which increased by 16.8 per cent between 2015 and 2019.

The final growth area in federal spending was national defence, which represented 11.8 per cent of overall growth. The 29 remaining categories of federal spending accounted for the remaining one-third of growth from 2015 to 2019.

The state of federal finances and the resulting risk that the country may be heading towards a fiscal crisis down the road require determined action on federal spending. Understanding the nature of the spending problem and how we as a country arrived at our current circumstances is key to developing a reasonable roadmap back to sustainability.

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