Be wary of the government's sudden conversion to fiscal restraint

One of the key narratives out of yesterday’s budget is that the Trudeau government has found fiscal religion. The budget was described as “modest”, “prudent”, and “restrained” by some key voices in the parliamentary press gallery. Finance Minister Chrystia Freeland even spoke of the country’s “proud tradition of fiscal responsibility” in her budget speech.¹ This is a big change from previous budgets and expectations heading into yesterday’s release.

Yet the numbers in some measure support this idea. As federal program spending normalizes in the aftermath of the pandemic, year-over-year growth is somewhat limited. The budget projects average annual spending growth of just 2.2 percent between 2023-24 and 2026-27. If the government were to abide by these spending levels, it would represent a sustained period of relative restraint in Ottawa.

There are three reasons, however, to be doubtful of this sudden conversion on the part of the Trudeau government. One is the government’s past record, another is the permanency of its so-called “temporary” pandemic spending, and the final one is its yet-to-be-implemented, yet highly-costly spending promises.

What’s past is prologue?

The government’s pre-pandemic fiscal policy is the best indicator of its policy preferences in relatively normal circumstances, as well as a majority government. It may therefore be the clearest and most unconstrained expression of what fundamentally makes the prime minister and his inner circle tick when it comes to the magnitude and scope of government spending.

During its first five years in office, the Trudeau government increased program spending by an average of 6.4 percent per year. The result is it rose from $248.7 billion in 2014-15 (which was the last full year of the Harper government) to $338.5 billion in 2019-20.

Had spending growth matched the government’s current rate of 2.2 percent annually over this same period, program spending would have reached $277.2 billion in 2019-20, or $61.2 billion lower than it actually was.

And that’s just a single fiscal year. Over the full five-year period, the cumulative difference would have been $165.4 billion which is significantly more than the $94.1 billion in accumulated deficits over the same period.

In other words, if the Trudeau government would have had its purported fiscal conversion several years earlier, the federal government would have not only entered the pandemic in a budgetary surplus, but it also would have accumulated far less debt along the way.

Nothing more permanent than temporary spending

The second proof-point against Ottawa’s newfound fiscal probity is the permanency of its pandemic spending. This is important because it reflects the government’s willingness to set parameters on the key distinction between short- and long-term spending.

Remember that pre-pandemic program spending peaked at $338.5 billion in 2019-20. Then of course the pandemic hit and the federal budget spiked to unprecedented levels due in large part to a massive, immediate-term increase in government spending.

Program spending hit $608.5 billion in 2020-21—a near 100-percent year-over-year increase. Yet the idea was that most of this spending was supposed to be temporary. It would help to sustain businesses and households in the face of government-imposed restrictions on economic activity and then withdraw as those public health mandates were lifted.

Yesterday’s budget, however, tells a different story. While spending increased by a whopping 99.8 percent in 2020-21, it’s only projected to fall by 22.3 percent in 2021-22 and 10.1 percent in 2022-23 before it resumes rising in 2023-24.

The key point here is that federal program spending will henceforth remain elevated relative to its normal trajectory. Just consider, for instance, that if instead of the massive pandemic-induced spike, the government had simply maintained its pre-pandemic spending growth of 6.4 percent per year, program spending in 2022-23 would have been $407.4 billion rather than $425.4 billion as projected in the budget.

The upshot is that even if the government had maintained its own, highly-elevated pre-pandemic spending levels, baseline program spending ought to fall far below where the government now projects. The $18-billion gap between pre- and post-pandemic spending in 2022-23, for instance, represents more than a 2-percentage point increase in the GST.

Temporary pandemic spending, in other words, has now become permanent. This isn’t a sign of fiscal prudence. It’s a level step to a new, permanent spending baseline.

What comes next?

The final case against the prevailing narrative is what isn’t in this year’s budget but is bound to come in future budgets.

Remember the government recently signed a parliamentary agreement with the New Democratic Party that outlined several high-spending commitments including pharmacare² and long-term care³ that weren’t reflected in the budget.

It’s hard to know when and how these promises will manifest themselves but it seems odd to assert that the Trudeau government will oversee a sustained period of fiscal restraint with such massive new, entitlement spending waiting to be enacted. They hang like the sword of Damocles over the government’s fiscal projections.

Pharmacare alone, according to the Parliamentary Budget office, would cost as much as $25 billion per year.⁴ Federal spending on long-term care could similarly be significant.

Just because these highly-costly promises weren’t reflected in this year’s budget isn’t a sign that the government has abandoned them altogether. The Liberal-NDP parliamentary agreement extends to 2025 and so it’s reasonable to assume that we see new spending in these areas in future budgets.

That is to say although the budget’s projections for program spending growth don’t account for these yet-to-be-implemented items, they still represent upward pressure on the government’s own spending plans. There’s a high probability therefore that a bet in favour of more and higher spending between now and 2025 pays out.

One final observation: the budget indicates that the independent economic projections that underpin the federal government’s own fiscal estimates were collected from private sector economists in early February. This signals to me that the government’s plan was probably to release the budget in March, but it was postponed until April—perhaps due to the economic and fiscal uncertainty caused by Russia’s invasion of Ukraine.

To the extent that this interpretation is true, it seems possible—even probable—that, as part of this reassessment about budget timing, the government opted to put big-ticket items such as pharmacare and long-term care in abeyance until the short-term uncertainty has subsided somewhat and we get closer to the 2025 election.

If this hunch is right, the key takeaway is that the narrative about the Trudeau government’s fiscal conversion is wrong. Just because the budget may not have been an immediate expression of its big-government thinking doesn’t mean it has seen the light on the road to Damascus.