Theo Argitis: Mark Carney’s big budget plan is less impressive than it seems

Justin Trudeau’s early intellectual influences as Liberal leader came mostly from Washington’s Democratic circles—think tanks like the Center for American Progress that focus on providing practical policy ideas to progressive governments.

Mark Carney, positioning himself as Trudeau’s successor, is looking elsewhere for inspiration—across the Atlantic, to his old stomping grounds in London.

Carney recently unveiled what he calls a “new approach to fiscal management,” a framework essentially lifted from the playbook of U.K. Prime Minister Keir Starmer’s Labour government. (No surprise, given Carney has been advising Starmer’s administration on policy.)

Carney’s plan would split Canada’s budget into two categories: day-to-day government operations, and public investment.

His pledge? Balance the operating budget within three years using existing tax revenue. Use debt to finance investment spending—but with limits based on a new debt-to-GDP rule. All these elements closely mirror Labour’s fiscal framework.

This accounting shift adds layers of complexity to how Canadian budgets are traditionally framed, but there are three key takeaways:

One, Carney wants the federal government to ramp up investment spending—through borrowing, not taxes. He sees this as a growth strategy, as a way to finance emerging spending pressures like defence, and as a key tool to drive an ambitious climate transition agenda. But it will require hundreds of billions more of government borrowing over the next decade and that will add to our gross debt.

Two, before accumulating more debt, the government needs to convince Canadians it has its fiscal house in order. Carney’s pledge to streamline government operations is designed to create that perception—to secure a license to borrow.

Three, Carney’s fiscal framework isn’t about tightening policy—it’s about how to loosen it credibly for investment spending

At his press conference last week, Carney sought to put as much emphasis as possible on the second takeaway: keeping day-to-day operating spending in check. But the more lasting impact of his framework would be to establish a permanent borrowing plan for investment spending.

How much borrowing are we talking about?

While much will depend on how investment is defined, Carney’s backgrounder mentioned that current capital spending is estimated at about 1 percent of GDP, or about $30 billion.

I’m guessing this is likely just a starting point for Carney going forward.

Just on climate, Carney’s campaign said in its backgrounder that Canada must invest $2 trillion by 2050—roughly $80 billion per year—to hit net-zero targets. Currently, that investment is between $10 and $20 billion. The implication is the government would need to help fill that massive gap.

We will also see pressure on spending grow in other areas, including defence and economic infrastructure. Carney also cited housing and trade corridors.

Under an ambitious investment plan, we could see annual borrowing of much larger magnitudes than the current $30 billion in federal capital spending. Carney is essentially abandoning formally the idea that Canada’s federal debt should plateau at all, as long as it’s in the service of investment.

For a sense of scope, look at the last U.K. budget.

In its fiscal plan, released four months ago, the Labour government used this exact same framework to increase borrowing for capital spending by 84 billion pounds over the next four years than what had been budgeted by the defeated U.K. Conservatives. In Labour’s case, that’s in addition to other spending that will drive additional borrowing by a cumulative 136 billion pounds over four years.

A few more thoughts on Carney’s plan.

Reframing

At its core, this is a reframing exercise. Nothing fundamental changes—just how the budget is presented. It’s a way of emphasizing investment as a priority.

In that sense, it’s sort of consistent with how the Liberals have framed their deficit spending for a decade now. In the last Liberal budget, the word investment appeared 440 times, versus just 35 for spending.

But Carney’s attempt to impose a formal structure on top of Liberal messaging reflects a recognition that Canadians have likely become more skeptical about rising debt levels—which have doubled under Trudeau.

Fiscal anchor

Carney, in a way, is also offering up the latest iteration of a federal fiscal rule or anchor.

The current government has abandoned so many fiscal anchors that it has lost credibility. Carney’s plan effectively introduces a two-pronged rule:

• A debt-to-GDP trajectory as the ultimate constraint on federal spending, including investment.
• A cap on operating expenses, tied to tax revenue.

Prudence

The former banker is also signaling prudence in two significant ways.

First, tying future operating expenses to tax revenue creates a strong incentive to control spending. No politician wants to explicitly hike taxes to fund government spending. Second, he’s pledging to cut taxes—as a sign of credibility. In other words, he’s already committed to financing a tax cut through this effort.

Balancing the operating budget sounds impressive, but under this framework, it’s less of an achievement than it seems. Excluding investment spending from the calculation inherently shifts the numbers toward balance without requiring actual reductions in day-to-day spending.

Inflexible

A key downside to balancing the operating budget is that it restricts the government’s flexibility to stabilize the economy. This is why such rules have never been widely used by national governments. And when they have, they’ve been abandoned. The U.K. government is already at risk of failing to meet its own operating budget rule, raising concerns they may need to raise taxes again to stay onside.

A version of this article first appeared in Means & Ways.