After a challenging 2023, Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland head into the new year facing significant pressure to test further the reach of the federal government’s balance sheet.

Just to stay in power, the federal government will likely need to launch a multi-billion pharmacare plan to fulfill a promise that it made to the New Democratic Party. A federal election, whenever it comes, will only stoke demands for additional spending. Adding to the pressure are structural challenges around aging, industrial policy, defence, Indigenous reconciliation, and the energy transition.

As a result, the next 12 to 18 months will see heightened debate over the state of the nation’s finances, as well as the amount of fiscal space that remains available and how best to use it.

We believe the federal government should resist any temptation to add to the fiscal framework at a time when debt has ballooned, interest rates have increased, and growth has slowed. Others will take a more sanguine view. Political actors will work hard to frame the discussion strategically to rally the public around their positions.

To help inform the coming debate, we offer a few observations that we think are worth highlighting.

Net debt

Let’s start with a reminder that there are a number of ways to measure debt and sustainability. Under the government’s preferred gauge—net debt—Canada’s fiscal position looks much better than most major economies—a fact that the current government has raised repeatedly to justify its spending.

But it has limitations.

Net debt is a narrow measure that deducts state financial assets from actual debt liabilities. In Canada’s case, this includes the fast-growing assets held by the Canada Pension Plan and the Quebec Pension Plan. The fundamental idea is that it’s the best way to assess longer-term solvency since, in theory, the government can tap into these financial assets to repay its debt if needed.

The concept is somewhat notional, however, since it’s tough to see any government raiding the nation’s pension assets even in a crisis.

Net debt also is less useful in analyzing the actual trade-offs that governments are forced to make in real-time. The burden of debt repayments is what actually matters for budget making, and borrowing costs can overwhelm a country’s finances and undermine growth well before any risk of a default eventually kicks in.

Gross debt measures and actual debt servicing indicators give a more accurate picture of the fundamental constraints faced by fiscal planners. And these indicators offer much less comforting international comparisons.

Discount the trajectory

When looking at Canada’s fiscal picture, we suggest discounting the government’s medium-term projections, which always show improving debt dynamics and a downward deficit trajectory that approaches balance and then fails to materialize.

In her November fiscal update, Minister Freeland even pledged to establish a “rule” in 2026 to prevent the deficit from ever again exceeding 1 percent of GDP—which we don’t find credible based on, among other factors, the Bill Parcells’ rule.

To project where the Trudeau government’s deficits will be in the future, take guidance from former New York Giants coach Bill Parcells, who famously said that you are what your record says you are.

Between 2017 and 2022, the Trudeau government ran deficits averaging 1.4 percent of GDP when adjusted for swings in economic activity—which not coincidentally is about the deficit projection for 2023 and 2024. That’s our best base-case assumption going forward under a moderate growth and interest rate scenario.

Spending matters

Current spending is not consistent with any meaningful reduction in deficit levels. Expenditures as a share of GDP—at 17.8 percent over the next two years—are structurally the highest levels since the 1990s.

In the post-World War II era, the federal government has managed to record a deficit of less than 1 percent of GDP only twice when spending exceeded the 17 percent threshold. That was between 1996 and 1998 at the very start of a decade-long period of fiscal consolidation.

In fact, history tells us risks are asymmetrical and tilted to the upside at these spending levels. Since the end of WWII, deficits have averaged more than 4 percent in years when spending has surpassed 18 percent of GDP.

This is an intuitive outcome. There are more constraints to raising revenue than there are to increasing spending.

Spending and deficits at current levels over a sustained period of time aren’t necessarily unstable as long as economic growth is robust, but that’s not a luxury we currently have with our abysmal productivity numbers and population aging.

Today, the bigger risk may be that we enter into an era where public debt charges outpace revenue growth—a dangerous inflection for debt dynamics.

Canadians’ ignorance of our own history is a pervasive and regrettable problem. The Hub is pleased to play a small part in attempting to turn this tide by presenting a weekly column from author and historian Antony Anderson on the week that was in Canadian history.

January 10 or 11, 1815: Sir John A. Macdonald’s birthday

“It may be said without any exaggeration whatever that the life of Sir John Macdonald, from the date he entered Parliament, is the history of Canada.”

– Wilfrid Laurier, House of Commons, June 8, 1891

Here’s a radical thought in this day and age: I remain in awe of this country. Here’s another radical thought: I remain in awe of Macdonald’s work and even the man himself. I see all his flaws and his failings. They’re right out there. Some are appalling. They reflect the larger tapestry of the world that shaped him. However, I was never looking for a saint in my search through history to understand this country, so, like I say, I remain in awe.  

He was born in Glasgow, Scotland in 1815 though we’re not sure of the day, possibly the 10^th of January (as noted in a birth registry), possibly the 11^th of January (as recorded by his father). It seems right that Canada’s first prime minister should be born somewhere else, a permanent note to the collective self that we Canadians have all, at some point, come from away. So in his birth, Macdonald is the embodiment of one of our defining ideas: we are the immigrant nation ever remade, and he is the immigrant so central to that remaking.  

When I think of Macdonald, I imagine the five-year-old boy, standing on the swaying deck of a crowded passenger ship, staring out at the endless ocean of fears and dreams, enduring six weeks at sea, his safe arrival hanging by thin threads, the captain, the crew, the weather. He was on that ship because his father, a failed shopkeeper, had run out of chances at home and decided to gamble on a remote cluster of scattered, disconnected British colonies with little in common and much to divide them. The family reached Quebec City and then embarked on another hazardous journey by river to Kingston in what was then Upper Canada—really a Scottish outpost. The tragic irony in this epic narrative is that these waves of desperate newcomers striving for more justice and hope were generating such a terrible injustice for the Indigenous nations they displaced.  

Macdonald’s parents gave their only surviving son the best education they could afford, and surely he was the fulfillment of all their wild dreams. He became a lawyer, established his own practice, made a name, and made his money in land deals and railway investments. He went into politics, swayed the crowds with his humour and savvy, and kept winning elections. Leaving behind local politics for the larger canvas of nation-building, he revealed that he could combine the visionary and the pragmatic. 

With friends and foes, he displayed a vulnerable human touch perhaps because his life was marked by so much heartbreak: a younger brother struck and somehow killed by a possibly drunken servant; a frail, bedridden first wife who succumbed to her many maladies after 14 years; a first son who died after 13 months; a daughter born in his second marriage, profoundly disabled who remained essentially a child her whole life. His second wife recalled him in his old age lovingly rummaging through the daughter’s box of toys, lost in his memories. His alcoholism at times overwhelmed him. 

Macdonald was of course caught up in some of the hateful thinking of his time, as we ourselves are caught up in our own. He said absolutely appalling things about the Chinese living in Canada at the time. He expected, indeed, hoped Indigenous Peoples would become good British subjects because he thought that was the best thing to be. He was, however, able to transcend some of this conventional thinking, perhaps most brilliantly with the central fact of Canadian politics. 

Macdonald came from a small, conquered nation that had endured invasion and imperialism and which then pivoted to co-exist and eventually flourish within a union of other kingdoms. Biographer Richard Gwyn has argued that this frame of view equipped Macdonald to better understand the demands and anxieties emanating from another conquered nation, Quebec. To appreciate Macdonald’s triumph on this point, one only has to behold George Brown, an influential newspaper editor, a father of Confederation, and a self-assured and virulent anti-French bigot. Even when he was arguing for the right reform, Brown’s pious stridency was toxic to the greater good. Hence Macdonald’s wise quip that Canadians preferred him drunk to George Brown sober. 

Confederation wasn’t Macdonald’s idea or even his great passion at first, but he grasped its potential, joined the incoming tide, and became a dominant creative force at the constitutional conferences that took place between 1864 and 1866, where he dug into the details and is thought to have authored most of the resolutions. The paper trail is frustratingly thin so we will never know the real extent of his contributions or the exaggerations. I suspect some of his greatest work was done informally, off-stage, where he used his formidable gifts of persuasion to shape essential compromises.

Then, as prime minister, he worked political magic to maintain the tenuous confederation of solitudes against improbable odds, anchored in his accommodations and tolerance with Quebec. In so doing, he laid the foundation for this, one of the world’s oldest and most inclusive democracies. Thanks to Macdonald’s work with Quebec, the common ground in this country has always become more and more expansive. That was his gift to us. 

As to his crimes or sins or limitations (however you wish to frame them), which were shared by the vast majority of his contemporaries, and which, no question, inflicted terrible harm and cultural devastation for the Indigenous peoples on this land, it is for the current generation of Canadians and no doubt the next to heal and reconcile that ongoing personal and communal anguish. Macdonald and his Canada could only see as far as they could. The same applies to us.