Finance Minister Chrystia Freeland will table her budget soon, probably the week of March 18, the only week in March when MPs sit in Ottawa. Should the federal government cut its spending, as economists at the CD Howe Institute suggest, or is the Canadian budget situation entirely healthy and viable, as Desjardins' economists insist?
At a time when the Conservatives, often leading in the polls, are calling for bigger budgets, we might wonder if the Trudeau government is strategically unwilling to begin a fiscal overhaul after eight years of deficits, debt and big investments in expensive projects. harsh
At the same time, is there a real problem with Canada's public finances? Do we really need to worry? Will the Trudeau government's budget deficit actually translate into significant social progress?
According to Statistics Canada, the Gini coefficient fell by 7% from 2014 to 2021, which means levels of inequality have decreased, and state policies have had to do something with it, particularly the creation of the Canada Child Benefit, which has helped reduce it. The household poverty rate has fallen from 12.9% in 2016 to 7.4% in 2021, again according to Statistics Canada data.
Budget cuts?
Now, many economists are concerned about the financial stability of the Canadian government. Since the Liberals came to power, the fiscal deficit has been calculated at over 550 billion. Net debt has grown from about $700 billion in 2015 to $1.3 trillion today. Central government debt increased from 31% to 42% of GDP.
Economists Don Drummond, Alexandre Laurin and William PP Robson of the CD Howe Institute released the budget they want to see in Ottawa on Wednesday. It's not like what we've seen in recent years. They immediately write that the 2023 fall government update lacks credibility and is unlikely to release funds to cut taxes and stimulate productivity in Canada.
What they are proposing are budget cuts to return to a balanced budget in 2027-2028. That's in three years! They recommended cuts of $11 billion in 2024-2025, $16 billion in the next two years, and $21 billion in 2028-2029. Economists also determine new tax revenue.
Project expenditure has increased from $264 billion in 2015-2016 to $339 billion in 2019-2020. The pandemic is expected to explode to 609 billion in 2020-2021. We will still be at 534 billion in 2028-2029, representing an average annual growth of 5.2% from 2019-2020 and 5.6% from 2015-2016.
Project spending increased from 12.9% of GDP in 2014-2015 to 17.3% of GDP in 2023-2024, according to fall federal economic development statistics. They are even expected to rise to 17.8% next year. With interest rates rising sharply from 2022, public debt costs are also rising.
According to economists, the problem is that economic growth is currently zero and will remain relatively weak in the coming years. And with rising interest rates, the debt service burden increases. It should reach 1.8 percent of GDP next year. As structural deficits continue to grow, it will become increasingly difficult for the Government of Canada to aim for a balanced budget.
In addition to the cuts, the CD Howe Institute proposes raising the age of access to Old Age Security from 65 to 67 by 2050, increasing taxes on seniors, and more. GST To bring it down to 7% by 2025, we need to cut taxes at the same time.
CD Howe believes cutting business taxes will boost productivity. However, the organization says little about the basis for this claim. Business taxes have been declining in Canada for over 25 years. The tax rate fell from 36% in 1980 to 15% in 2012. However, Canada's productivity remains below the national average.OECD and most of the G7 countries.
Research, Innovation, Science and Productivity
The answer may lie in a major reinvestment in science, research and innovation to put Canada back on track in terms of productivity, meaning productivity per hour. In a study published last summer, TD wrote that Canada's productivity deficit is attributable to several factors:
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“Ineffective regulatory and tax policies”;
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“High concentration of small businesses in production and employment. Small firms generally export and invest less than large firms”;
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“Investments in non-residential structures, machinery and equipment and intellectual property have been inadequate since 2015”;
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“Investments in research and development have continued to decline in Canada, while they have increased to varying degrees in all other G7 countries.”
TD highlights that investments in research and development will account for 1.7% of GDP by 2021. 50% less than USA and less than other countries.
A few weeks before the budget, many researchers have called for massive investment from the government in science, research and innovation. In a letter published on Thursday, they denounced this fact For 20 years, Canada has enjoyed a national commitment to funding scientific research
At the same time countriesOECD tend to increase their investments in research compared to GDP.
On the initiative of Marc-Denis Rioux of the Department of Mathematics, Computer Science and Engineering at the University of Quebec in Rimouski (UQAR), professors from several universities have confirmed this in a letter to Federal Innovation Minister François-Philippe Champagne. From 2000 to 2022, Average of countries' research investmentsOECD 2.12% to 2.72% of GDP. The US spent 2.62% of GDP in 2000 and will spend 3.46% in 2022, an increase of nearly 32%. By comparison, in Canada, it has gone from 1.86% of our GDP in 2000 to 1.55% in 2022, a decrease of 16%.
This is very disturbing. Canada no longer invests enough in research. The observation is clear, we're missing the boat.
Even more alarming, they say, funding for basic research has a poor relationship to research funding in Canada. […] Limiting innovation and subordinating research funding to corporate interests can lead to a crisis of public trust. Science is increasingly seen as serving private interests and serving the public good.
We lost an entire generation of researchers due to the lack of research career opportunities in the period from the early 2000s to the present. This is especially true in areas of basic research where funding is more difficult to obtain.
When we compare ourselves, we convince ourselves
Desjardins economists decided to look at the situation in detail and compare it with other countries. Canada is one of the cleanest dirty shirts in the fiscal laundry basket
, writes economist Randall Bartlett in an economic note published Thursday. Yes, governments have to deal with chronic deficits, but that's the image used to say that the situation in Canada is no worse than elsewhere. She is even better.
The IMF Canada's overall general government annual deficit is expected to be the lowest among G7 countries, Australia, New Zealand and Spain over the next five years.
Desjardins writes.
The Canadian government deficit as a proportion of GDP in fiscal year 2023-2024 will be the lowest among G7 countries.
Photo: Desjardins
Canada has one of the least indebted developed economies. Desjardins talks about Beyond the line
To qualify the comparative position of the country's public finances. However, even if it is universally recognized, we are not proud of it within our borders. However, this is an important point for more people to know, because a common understanding of a set of facts will help them decide whether Canada's fiscal policy is moving in the right direction. Otherwise, they base their conclusions and opinions on myths.
Canada's net debt is very low compared to the other nine countries included, Australia, New Zealand and Spain.
Photo: Desjardins
Still, Canada shouldn't take anything for granted, writes the Desjardins economist. The federal government must credibly commit to reducing its debt-to-GDP ratio by reducing its expenditures, especially those under its control, such as operating costs. Also, to ensure long-term sustainability of public finances, policies should place greater emphasis on productivity and wealth creation.
Political competition
It is clear that the Trudeau government fundamentally believes in the importance of investing in social services and social protections. These obligations include dental care, low-cost daycare, and Canada Child Benefit, which, while expensive, improves Canadians' quality of life.
There is also an urgent need for action on the growing housing and homelessness issues. Again, additional investments from the central government may be required.
Today, the government must respond to a demand from the New Democratic Party (NDP), with whom it has reached a parliamentary agreement, that calls for universal drug coverage. According to the Parliamentary Budget Officer, the plan would cost the state about $13 billion, but would allow citizens, businesses and provinces to save. About 20% of Canadians are not covered by insurance for their prescriptions.
What will an elected Trudeau government do after eight years in power? Will it stay true to its DNA by focusing on investments that improve the quality of life for Canadians? Or will the budget be tempted to initiate a shift towards austerity? To be continued…
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