A cursory glance at Ottawa’s fall economic statement leaves the impression of a government that has, at last, discovered the virtues of fiscal restraint.
The Liberals have boosted program spending from what was projected in the spring budget, with program expenses increasing a cumulative $20.9-billion over four fiscal years (excluding climate rebates). That may seem like a substantial sum, but it is just one-third of the tab from last year’s update, when program spending over four fiscal years rose $60.2-billion above and beyond that year’s budget projections.
In addition, Finance Minister Chrystia Freeland has made much more specific commitments for next spring’s budget on the direction of federal finances. This year’s deficit will be no higher than $40.1-billion, the government promises. The ratio of federal debt to the size of the economy for fiscal 2024-25 will be lower than current forecasts. Similarly, the size of the deficit relative to the economy will decrease in fiscal 2024-25, and will fall below 1 per cent of GDP in fiscal 2026-27.
That eliminates the studied vagueness of the Liberals’ previous fiscal pledge, which promised to push down the debt-to-GDP ratio over the medium term – the medium term never quite being defined.
But dig deeper into the budget update and what emerges is a picture of a fragile fiscal framework, which could be shattered by an economic downturn, or less hypothetically, by the looming tab for the Liberals to keep the NDP within the embrace of their parliamentary alliance.
Debt servicing costs are already on a sharp upward path. Last fall, the government projected it would pay $217.8-billion in interest costs from fiscal 2024 through to fiscal 2028. In the spring, that five-year forecast rose to $235.1-billion and jumped higher still to $265.7-billion in Tuesday’s update.
The Liberals point out that debt charges compared to the size of the economy are still near historical lows. That’s true, although part of the reason is that inflation has helped to swell GDP and in so doing, shrink the relative debt burden.
But there’s a different, more worrying metric: debt costs are eating up a larger share of federal revenue, rising from 7.7 per cent in fiscal 2023 to 10.4 per cent in fiscal 2025. Even those worrying trends are contingent on economic growth (barely) outpacing interest rates. It would not take much, a relatively mild recession, to tip the balance the other way and for the cost of the national debt to start rising relative to GDP. If that were to happen, would the Liberals stick with their newly honed fiscal commitments and pare back spending in a downturn? To ask the question is to answer it.
Those are the macroeconomic risks. The political risks to the budget are, if anything, greater. The cost of a national pharmacare program does not yet make an appearance in the government’s fiscal framework. The Parliamentary Budget Officer has estimated that a full-blown program would cost $11.2-billion in its first year, rising to $13.4-billion by the fourth year. Ottawa would surely try to foist some of those costs on to the provinces, but there is no guarantee of relief for the federal pocketbook.
NDP Leader Jagmeet Singh has made it perfectly clear that he expects the Liberals to keep their promise to lay out a path to a national pharmacare program, a central plank of the 2022 parliamentary alliance agreement.
That leaves the Liberals with a trio of problematic choices. They could renege on their pharmacare pledge to the NDP, likely hastening the end of their alliance and running the risk of stumbling into an election while they lag badly behind the Conservatives in public opinion polls. Or the government could launch pharmacare, pile that cost on to existing spending projections and abandon its newborn commitment to fiscal restraint.
And then there is the third unappealing path: the Liberals could scale back other spending to create fiscal room for the billions of dollars needed for pharmacare. There is ample room in the federal budget to find savings, the bloated civil service payroll being the most obvious candidate. But would the Liberals, heading into an election year in 2025, be willing to lay out aggressive cutbacks to keep their fiscal framework intact?
The government’s fiscal framework dodges that conundrum, but the Liberals cannot put off the choice indefinitely. Soon, they will need to pick between their word, and their political needs, between their short-term fortunes and the long-term future of the country’s finances.