The ever-receding horizon of Liberal fiscal restraint

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Spending restraint in a Liberal fiscal plan is a bit like the horizon at sea. It’s always visible in the distance, but you never get there.

Last fall, Finance Minister Chrystia Freeland tabled forecasts in an economic and fiscal update that had a plausible claim to fiscal prudence, showing the budget moving into a small surplus of $4.5-billion in fiscal 2028. That surplus evaporated by the spring, when the Liberals boosted spending over their forecast horizon. What had been $105.8-billion in cumulative deficits from fiscal 2024 to fiscal 2028, edging into a surplus, became instead $174.7-billion in cumulative shortfalls, and a deficit in the final year of $14-billion.

That’s part of a pattern of the Liberals using each budget and update to boost spending. Ms. Freeland will unveil this fall’s economic and fiscal update on Tuesday, but the Parliamentary Budget Officer is already forecasting this year’s deficit at $46.5-billion, up from the budget’s forecast of $40.1-billion. The PBO’s estimate, of course, does not take into account any new spending that Ms. Freeland may choose to roll out next week.

As the accompanying chart shows, rolling out new spending has become standard practice for the Liberals in their fall fiscal updates. The habit has grown more pronounced during Ms. Freeland’s tenure as finance minister, but her predecessor, Bill Morneau, also indulged in the practice.

In the December, 2019, fiscal update, Mr. Morneau added $9.9-billion in program spending over two fiscal years. That figure does not include debt charges or actuarial adjustments in the future cost of Ottawa’s benefit obligations to its employees.

Mr. Morneau was relatively thrifty. When Ms. Freeland delivered her inaugural fiscal plan in the fall of 2020, she added $44.7-billion in program spending, again over a two-year span, compared with the summer fiscal update that already included the emergency spending programs launched as the coronavirus pandemic swept the globe.

That new spending could be justified by the need to extend pandemic programs. But the Liberals have continued with their habit of larding on additional spending each fall. In the 2021 fiscal update, Ms. Freeland added $57.5-billion in program spending over five fiscal years. Last year, she upped the ante, adding $75.9-billion in program spending over five years.

Which brings us to this fall’s update, and to how many extra billions of dollars in spending the Liberals will tack on to an already swollen budget. Some costs are already broadly known: billions of dollars for the contract settlements with public sector unions this spring; hundreds of millions for heat-pump subsidies and lost fuel charge revenue; and presumably some accounting for the $28.2-billion or so in subsidies earmarked for electric-battery facilities.

A national pharmacare program, a key plank in the Liberals’ parliamentary alliance with the NDP, would drive up permanent program spending substantially. According to the PBO, the price tag in the program’s initial year would be $11.2-billion, increasing to $13.4-billion within two years. (Ottawa could try to off-load some of those costs to the provinces.)

At least those billions in added spending are choices that Ottawa could make or not make. The mounting cost of servicing a massive federal debt is decidedly not optional.

As University of Calgary economist Trevor Tombe points out, Ottawa’s monthly interest costs hit a record $4.3-billion in August. Long-term interest rates have risen since the spring budget, even as the economy softened. Prof. Tombe warns that Ottawa’s finances could soon be on an unsustainable path, where growth in debt-servicing costs outpaces increases in revenue.

There is not yet a crisis. But will Ms. Freeland finally look to the horizon and stick to a course of fiscal restraint? Or, as is much more likely, will the Finance Minister spend yet more now while promising thrift years hence?