Ottawa’s ‘fiscally prudent approach’ drenched in red ink
When discussing the upcoming federal budget, Finance Minister Chrystia Freeland recently said the Trudeau government will “continue to take a fiscally prudent approach” given the uncertainty in the world economy. But Canadians should be cautious about the minister’s definition of fiscal prudence given the government’s history on spending and deficits.
A fiscally prudent approach to government finances must include spending restraint, both when the economy is growing and during times of recession. Fiscally prudent governments run surpluses and pay down debt when times are good so they can brave the storm during tougher periods such as recessions or pandemics.
Unfortunately, despite Freeland’s claims, the Trudeau government has not followed this approach. Since taking office in 2015, the government has run eight consecutive deficits even though it promised to return to balanced budgets four years ago. The result has been a $599 billion (adjusted for inflation) or 48 per cent increase in total debt in less than a decade. The government plans to run at least four more deficits, add tens of billions more in debt, and not balance the budget before 2027.
How did this run-up in debt occur?
Simply put, a proclivity to spend. The Trudeau government is projected to record the five highest levels of federal spending per person (excluding interest costs) in Canadian history (2018, 2019, 2020, 2021 and 2022). Prior to COVID, federal spending reached $10,954 per person in 2019/20, which was the highest level ever at that time.
Spending levels rose dramatically during the pandemic and peaked at $19,208 per person in 2020/21. However, only one-third of this spending was COVID-related. In 2022, federal per-person spending will reach a projected $11,498, which is higher than the record levels recorded before the pandemic.
And the government has done a poor job at managing unexpected revenue. Rather than moving towards a balanced budget with the influx of money it received, the government has chosen to spend it at every turn.
For instance, in 2022/23 the government presented a full budget in the spring and a fiscal update in the fall. In the seven months between the budget and the update, the government discovered its revenues would be substantially higher than forecasted so it increased spending (excluding interest costs) by more than $13 billion, meaning that despite a material increase in revenues, there was no improvement in the bottom line.
Based on her recent comments, Minister Freeland believes this approach of persistent deficits, record high spending and substantial debt accumulation has been “fiscally prudent.” In other words, we can expect more of the same in this year’s budget.
The consequences of fiscal imprudence are clear. Just like households, governments must pay interest on debt they accumulate. In 2023, federal debt interest costs are expected to eclipse $43 billion—nearly double what the government spends on employment insurance benefits. Moreover, debt must be repaid by future generations of Canadians through tax increases or a reduction in services.
A fiscally prudent government in Ottawa does not continuously run deficits and substantially exceed its own estimates on spending. Being fiscally prudent means making difficult decisions while opting not to pass on a legacy of debt to future generations. The Trudeau government has yet to demonstrate such an approach.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.