Federal government can balance budget with relatively modest spending restraint

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Appeared in the Globe and Mail, February 14, 2024
Federal government can balance budget with relatively modest spending restraint

Next month, in all likelihood, the Trudeau government will table its federal budget. The Trudeau government has never balanced the budget during its decade in office. Instead, it’s ran continuous deficits with no end in sight. However, if the government changes its spending habits, there’s a clear path to budget balance in one to two years.

On the campaign trail in 2015, the Trudeau Liberals promised a series of short-term deficits—all less than $10 billion—before returning to a balanced budget in 2019/20. Nearly a decade later, the Trudeau government is on track to run nine consecutive deficits, with all but one exceeding $10 billion. In fact, starting in 2019/20, federal deficits have all exceeded $35 billion. Even when excluding COVID-related spending, 2020 and 2021 remain the two highest years of per-person federal spending (inflation-adjusted) in Canadian history.

Current projections show more of the same, with deficits exceeding $18 billion expected for the next five years. Clearly, the Trudeau government has failed to keep its balanced budget promise.

Here’s why. From 2014/15 to 2023/24, the government increased annual program spending (which excludes debt interest costs) by $193.6 billion or 75.5 per cent, mainly by borrowing.

This imposes significant costs on Canadians. By consistently spending more than it collects in revenue, the federal government has accumulated a large amount of debt—roughly $33,682 per person. The government must pay interest every year to service this debt, which accounts for a significant portion of the budget. For example, in 2023/24 the federal government will spend $46.5 billion on debt interest, substantially more than it will spend on child-care benefits, for example.

Additionally, by running deficits the government increases the tax burden on future generations of Canadians who are ultimately responsible for paying off today’s debt. Research suggests that one dollar borrowed today must be paid back by more than one dollar in future tax revenue. Simply put, deficits impose a disproportionate tax burden on future generations.

Although the government projects that deficits will continue for the foreseeable future, according to a new study published by the Fraser Institute, with relatively modest spending restraint the government can balance the budget within one to two years.

For example, if the government reduced program spending by 4.3 per cent between 2024 and 2025 it could balance the budget within one year. The following year, the government could resume increasing spending and still run an $8.2 billion surplus. Alternatively, the government could balance the budget in 2026/27 by slowing annual spending growth to only 0.3 per cent for two years.

Again, these two scenarios represent relatively modest spending restraint. Indeed, to balance the federal budget in the 1990s, the Chrétien Liberals reduced program spending by 9.7 per cent over two years—significantly more than the spending adjustment proposed in either scenario here.

So, the Trudeau government could quickly balance the budget if it changed its spending habits. But where to begin?

For starters, the government could reduce or eliminate corporate welfare. From 2007 to 2019, Canadian governments including the federal government spent roughly $352.1 billion (inflation-adjusted) on corporate welfare, yet research suggests this kind of spending produces little to no economic benefit. In fact, governments might actually harm the economy when they pick winners and losers in the free market. And there are many other areas for Ottawa to reduce spending—but it requires discipline.

The Trudeau government’s undisciplined approach to spending has produced nearly a decade of consecutive deficits. If it wants to balance the budget in the near future, the government must begin to rein in spending in its upcoming budget.