The Liberals’ new definition of restraint: overspending by less than they had previously

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This year’s fall economic statement, I read in the news, was all about “restraint.” But then, so was last year’s statement. So was the spring budget, and the budget before that.

Every time the Liberals update the country on the state of its finances, it is accompanied by pages of prose trumpeting the government’s devotion to fiscal restraint. And yet, every time, spending somehow ratchets higher.

Over the years this contradiction has required ever more creative arguments to conceal. This time around the line is that, although spending is higher, deficits are higher and the debt is higher – tens of billions of dollars higher – than projected in the budget eight months ago, they are not as much over budget as they were expected to be.

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And, fair enough, the deficit for the current fiscal year is now projected at $40-billion: $5-billion more than it was last year, $10-billion more than it was projected to be this time last year, but the same as in the budget – and $6-billion less than the Parliamentary Budget Officer had projected.

How did this miracle come to pass? Did the government slam on the fiscal brakes, issue an emergency austerity decree, cancel needless spending programs, even fundamentally rethink the role of government? No: They marked down spending by $5-billion due to “an increase in expected recoveries from benefit overpayments for emergency COVID-19 income support.” Expected, mind: we’ll see if it actually happens.

But as for spending in out years, it has just leapt again. Here’s the spending track from the budget for the next four years, fiscal 2025 to 2028 (all figures in billions):

$467.5 $478.7 $489.2 $506.5

And here’s the spending track from the fall statement:

$469.4 $487.4 $499.4 $516.4

On average, that’s roughly $8-billion a year more. (The figures here include adjustments to pension liabilities, which for no good reason the current government has taken to stating separately.) Yet it passed all but unmentioned in the coverage.

The bulk of the new spending is tucked into that opaque catch-all, “other transfer payments,” now worth $84-billion and headed for $100-billion in four years. The statement dryly notes this “reflects recent measures with growing profiles” – the new Canadian Dental Care Plan, subsidies for electric-vehicle battery manufacturing, and tax credits for “clean economy” investments. Nice work if you can get it.

The corresponding deficit figures have also been adjusted sharply upward. Here is what the deficits were projected to be in the budget:

$35.0 $26.9 $15.7 $14.0

And here are the deficits, as of the fall economic statement:

$38.4 $38.3 $27.1 $23.8

About $9-billion a year higher, on average. How could this be, when annual revenues are also projected to be $6-billion higher? Because – and this is the real story of the statement – the costs of interest on the federal debt have also shot up. Once again, here are public debt charges for the next four years, as of the March budget:

$46.0 $46.6 $48.3 $50.3

And here they are, as of the fall economic statement:

$52.4 $53.3 $55.1 $58.4

The point here is not just that interest costs are now expected to be higher than they were previously expected to be. The point is that interest costs had already exploded even before this latest revision. Assuming the estimate for the current fiscal year, at $46.5-billion, remains valid at year-end, interest costs will have nearly doubled in two years.

Interest costs now absorb 10 cents of every dollar in revenues – nowhere near as high as in the 1990s, to be sure, but the highest in a decade. By next year, the federal government will be spending more on interest on the debt than it does on health, twice as much as it does on national defence, or as much as it does on employment insurance and the Canada Child Benefit combined. And all this is the optimistic scenario!

By now it should be clear that this government’s fiscal projections are entirely untrustworthy: They almost invariably understate the real figures by billions of dollars. There is no reason to think these latest projections, dismaying as they are, are any different. The revisions will themselves be further revised.

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For example, even these latest projections for program spending require us to believe that operating expenses – that is, the roughly one dollar in four of federal spending Ottawa spends directly, through its own departments, rather than transfer to others to spend – will be held flat or even below current levels for the next several years: a claim the government has been making for several years running, without success. (Forecast operating expenses for fiscal 2024, as of Budget 2019: $97.3-billion. Forecast as of this week: $125.9-billion.)

A similar skepticism should attend the government’s latest choice of fiscal anchor, or rather fiscal anchors: a declining debt-to-GDP ratio “from 2024-25 onwards,” plus deficits of less than 1 per cent of GDP as of 2026-27. But a declining debt-to-GDP ratio was already supposed to be the anchor. The reason the government has pushed the start date out to 2024-25 is that the ratio is now growing: larger this year than last, and projected to be larger next year than this.

As for the 1 per cent of GDP target for deficits, this amounts to a vow to go on running deficits. The government could eliminate the deficit in four years with the barest modicum of restraint. That it refuses to do so is a choice, impelled, one suspects, by politics: to differentiate itself from the Conservatives, who promise, without saying how or when, to balance the budget.

The government, in short, borrowed big to spend big – not just during the pandemic, but before and after – on the premise that “historically low interest rates” were here to stay. It was basically free money. Interest rates have since risen substantially, but rather than borrow less or spend less, the government is proposing to do more of both.

The case that this represents any sort of restraint, then, rests entirely on the idea that the government might have spent even more: More, that is, than it spent last year – at more than $10,400 per capita in 2022 dollars, third highest on record, behind only the two previous years.

That may indeed explain why the housing package, supposedly the centrepiece of the plan, was so anemic. All told, the government claims a raft of previously announced measures will result in the construction of about 280,000 new homes over the next several years. The fall economic statement adds about 30,000. Great: The Canada Mortgage and Housing Corp. estimates that to bring prices down to more affordable levels we’ll need 5.8 million new units by the end of the decade.

What else is in the document? There are some encouraging-sounding changes coming to the Competition Act, intended to beef up the Competition Bureau’s enforcement powers, though much will depend on the details. Certainly there is ample evidence that competition in Canada’s domestic market is not as intense as it might be – a big reason why productivity growth is so sluggish.

But the worst examples of these are not for any failure of governments to enforce the Competition Act. Rather, they are the deliberate creation of government policy. I speak, of course, of the government-protected oligopolies that rule the banking, telecommunications and airline sectors (to say nothing of the government-organized cartels, collectively euphemized as “supply management,” on which we are forced to rely for a number of essential food items).

Not surprisingly, Canadians pay some of the highest prices in the world for each. Yet rather than dismantle the legal barriers to foreign investment that prevent effective competition in these industries, the government proposes a series of gimmicks and Band-Aids: a Mortgage Charter, a banking ombudsman, and a ban on “junk fees” that just happen all to be charged by airlines, banks and telcos.

(A more promising exception: the government seems prepared at long last to move on “open banking,” allowing consumers to transfer their financial data with them when they change financial institutions – though again, the details will tell how real this turns out to be.)

A couple of other items of note. The government proposes to offer “contracts for difference” to businesses that invest in reducing carbon emissions, insuring them against unexpected changes in future carbon prices – notably, if a Conservative government were to abolish carbon pricing. It’s a defensible policy, but the costs are potentially eyewatering, amounting to nearly half of the Canada Growth Fund’s $15-billion in capital.

There’s also some very strange, and troubling, language around pension funds. The statement announces the federal government “will work collaboratively with Canadian pension funds to create an environment that encourages and identifies more opportunities for investments in Canada by pension funds.”

Creating an environment that encourages more investment in Canada by anyone is of course much to be desired – desperately needed, in fact. But why single out the pension funds? And what exactly would this “encouragement” entail? There were already whispers that the government was thinking of restoring the old cap on pension funds’ foreign investments. This will only amplify them.

I’ve saved the worst for last. Deep in the document you find a brief reference to “Supporting Journalists and News Organizations.” Sure enough, the government is proposing to extend the supposedly temporary tax credit for newspapers’ labour costs, and increase it from 25 per cent to 35 per cent – exactly as the publishers’ lobby had demanded.

More dependence on government, less independence from government, just as we head into an election season. That will do wonders for our credibility. Worse, it will only encourage us to keep on doing the same things, as an industry, that got us into such trouble in the first place.

But never mind. No doubt the industry will continue to call for restraint in government spending and an end to corporate welfare – for everyone else.