Prime Minister Justin Trudeau’s plan to add billions of dollars in new annual spending has some economists worried that Canada is at risk of racking up unsustainable debt — especially if economic growth comes in worse than expected.
(Bloomberg) — Prime Minister Justin Trudeau’s plan to add billions of dollars in new annual spending has some economists worried that Canada is at risk of racking up unsustainable debt — especially if economic growth comes in worse than expected.
Finance Minister Chrystia Freeland’s latest budget added C$43 billion ($32 billion) in net new costs over six years, primarily by increasing health-care outlays and clean-technology subsidies to compete with the US Inflation Reduction Act. She’s wrong to describe the budget as prudent, with overall program spending set to balloon to 51% above pre-pandemic levels by 2028, according to Derek Holt, an economist at Bank of Nova Scotia.
“Big spending, big deficits, big debt, high taxes, high inflation and bond market challenges are not the path to prosperity,” Holt said in a report to investors Wednesday that described the country’s federal and provincial governments as “addicted to high spending.”
The spending growth comes even as the government projects C$34 billion less in revenue over that six-year span, compared with projections it released in November. Higher interest rates are expected to drag on economic growth.
“Canada has departed from its post-1990s and pre-pandemic voter caution toward big spending promises and has entered a new era driven by massive spenders at federal and provincial levels of government,” Holt said. “The risk is toward even bigger deficits if GDP performs worse than expected versus the budget’s use of stale forecasts from February — before recent turmoil — and that project no contraction.”
Additionally, the green subsidies announced in Freeland’s budget get richer over time. While the budget put their net cost at around C$20 billion over the next five years, the finance department projects the cost of the various green tax credits will top C$80 billion by 2034.
When asked about Holt’s report, both Trudeau and Freeland defended their spending as necessary and argued Canada is in a better fiscal position than its Group of Seven peers.
Freeland also said the green incentives will help growth in the long run, and cited an assessment of the budget by former Bank of Canada Governor Stephen Poloz. “If you are making investments that increase the economic capacity of the country, that is fiscally responsible,” she told reporters in Ottawa.
The budget’s fiscal projections carry a lot of downside risk, said John Manley, who was finance minister in 2002 and 2003 under former Liberal Prime Minister Jean Chretien.
If deficits do get worse, future governments may face difficult decisions about slashing programs, he said. In the 1990s, Chretien’s government had to take drastic action to get Canada’s debt under control, and Manley said his own budget as industry minister suffered deep cuts.
“If Liberals don’t want to face that kind of calamity, then it’s way better to manage the growth of your expenditures and manage your revenue carefully,” Manley said on BNN Bloomberg Television. “Because otherwise, there’s a reckoning coming, and somebody’s going to have to face it.”
(Updates with Trudeau and Freeland’s response.)
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