This Is Not An Ordinary Federal Budget

Thank you very much, Senators, for the opportunity to meet and share my views on Canada’s economic and fiscal situation in the lead-up to the upcoming federal budget.

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Because of the unprecedented attacks on our prosperity and sovereignty from the Trump administration in the U.S., Canada’s economy is now at a historic juncture. This budget will be an important marker in our response to this challenge. It is not a normal budget, and it cannot be debated and analyzed through a normal lens.

Canada is in a struggle for our long-term viability as a distinct economic, democratic, and social entity. The pre-eminent importance of defending our country, protecting our industries, and sustaining our communities must shape the decisions made in this budget. The situation is not unlike a wartime budget – although I fervently hope it doesn’t come to that.

Government’s role is never to “balance its books”. Government’s role is to do whatever is necessary to protect its citizens – an imperative that is all the more urgent at a time like. This doesn’t mean that budget balances are irrelevant. Simply that they must be understood in context of the broader mission and responsibility of government.

Thank goodness Canada didn’t worry about balancing the budget during the Second World War. Thankfully, we are not in the same scenario today. But we nevertheless face a historic and overarching challenge to protect Canada, our economy, and our values. Debate over the upcoming budget must be framed in that context.

Predictably, most of the public discourse around the budget is focusing too narrowly on how big will the deficit be. This focus is unhelpful. The deficit will be significant, no doubt about it. And it should be.

Partly because Canada is on the verge of recession (if we are not already in one). Deficits are appropriate in that situation. But more importantly because of the enormous responsibilities government faces right now, which will clearly require deficit funding: including aid to export industries, investments in infrastructure, strengthening income supports (like EI) and public services for Canadians who need them, defense spending, and more. Those things have to be done. And as Keynes famously showed, if we can do something, we can afford it.

The federal government’s net financial debt as of June 30 this year was equivalent to 33% of GDP (Statistics Canada Table 38-10-0237-01). Its accumulated deficit (including actuarial liabilities) at end of fiscal 2024 equaled 42% of GDP (Finance Canada Fiscal Reference Tables, Table 2). Deficits are expected for the past and next fiscal years in the order of 2-3% of GDP.

Contrary to the exaggerated claims of some critics, this does not constitute an emergency in any way, shape or form. Indeed, given an appropriate macroeconomic context (with decent growth and moderate interest rates), deficits of that scale could be incurred every year, while maintaining stability in the debt-to-GDP ratio (which is a much more relevant measure of fiscal position than the size of the nominal deficit measured in billions of dollars).

Canada’s deficit and debt are small relative to other industrial countries. Many of those other countries face similar challenges to Canada – although Canada is more exposed to the consequences of Mr. Trump’s madness than almost any other country. So, if anything, our deficit should be bigger than those other countries, not smaller.

Government debt is smaller in relative terms than private debt in Canada. The debt of non-financial corporations equals 150% of GDP. The debt of Canadian households equals 175% of their disposable income. Businesses and households pay higher interest on their debt, have less capacity to manage the broader environment in which they operate, and are more financially precarious than governments (which cannot go bankrupt). Reducing the federal government’s debt by shifting a fiscal burden to households or businesses (through spending cuts) makes the overall debt situation worse, not better.

In this context, I feel it necessary to express my disappointment at the recent interventions from the interim Parliamentary Budget Officer, Mr. Jacques. His judgments that Canada stands “at the precipice” of fiscal crisis, and that the federal fiscal situation is “stupefying” and “shocking”, are economically and historically false, and frankly irresponsible. His mandate is to provide neutral information on budget issues to Parliamentarians, but both the content and the mode of delivery of his remarks have veered far into advocacy, and have done a disservice to informed policy discourse. He should correct those statements. They undermine the credibility of any future research his office produces.

I am very sympathetic to the concept, floated by the federal government, of treating investment and current spending separately in fiscal policy and planning. Of course, we already do that (with accrual accounting and depreciation methods). But a more explicit disaggregation of capital and current spending is helpful, in part so Canadians can better understand the purpose and value of public debt in the context of investment.

When debt is used to finance construction or acquisition of a productive asset, its impact on fiscal sustainability is quite neutral: entries appear on both sides of the balance sheet, and the gradual cost of future depreciation can be offset by proceeds generated by the productive asset.

However, this distinction between investing and saving is not justification for austerity in current program spending. To the contrary, treating public investment as a distinct pillar of fiscal policy provides more fiscal (and political) room for continued federal support for current programs, not less. There is no evidence by any relevant indicator (program spending relative to GDP, federal public sector employment as a share of employment, etc.) that current federal program spending is too high or needs to be cut back. Austerity imposed on current programs would impart a strong and needless contractionary drag on Canada’s economy at a moment when it is already struggling to maintain growth. As always, cutting back government spending in a time of macroeconomic weakness is self-defeating and destabilizing.

To sum up, buttressing Canada’s economy in the face of Mr. Trump’s trade war will require a combination of urgent measures, all of which will require more powerful and determined federal intervention:

• • Supporting Canadian export industries to survive Trump’s tariffs, with emergency aid for firms and workers, and help with retooling and reorienting production and marketing away from the U.S.
  • Investing in public energy, transportation, and social infrastructure to support industrial diversification, productivity growth, and quality of life.
  • Supporting defense spending and other international engagements to strengthen relationships with other countries and promote international stability.
  • Continuing to support current public programs, including provincial transfers for health care and education, and the new federal commitments for pharmacare and dental care.

These are historic priorities. The federal government has abundant fiscal capacity to fulfil its responsibility to lead Canada into a new chapter in its economic history.