With Tuesday’s federal budget receding into history, the
opportunity for more reflection emerges and the best way to do that is to look
at some charts that consider the budget's projections going forward. In terms of overall impressions, the mantra
of this budget was simply “to spend less so we can invest more”. After looking at the numbers, the reality is
really “to spend less on some things so we can spend a lot more on some other
things”. It bills itself as a
transformative budget to address a changing economic world that will build a confident,
secure Canada though generational investments in infrastructure and defence and
does so largely by adding significantly to the national debt through a series
of large deficits.
The expenditure trajectory is largely a continuation of what
was. However, there is a compositional shift
in that spending away from spending on social infrastructure and towards
physical infrastructure. In essence, the
federal budget seeks to grow the economy by investing in a lot of public infrastructure
projects and national defence and then providing incentives to encourage
the private sector to join in. The broad dimensions of both the spending and
the outcomes are summarized in the following charts.
Figure 1 plots total federal revenues, expenditures (left
axis) and the deficit (right axis) starting from 2010-11and going forward to
2029-30. As well, each series is fitted
with a linear trend. By 2029-30, total
revenue is projected at $583.3 billion and total expenditure at 639.9 billion
for a deficit of $56.6 billion. From
2025-25 to 2029-30, total revenues will grow by 14.1 percent, total expenditures
will grow 16.9 percent and there will be $321,7 billion in accumulated
deficits. Note the linear trends. The deficit
over the long term is growing as the gap between revenues and expenditure is
rising.
A lot is going to be borrowed and servicing the debt will
become more expensive over time. Figure
2 plots both the nominal value of debt charges ($mm) as well as the total
expenditure share of debt charges (percent) and does so over a much longer-term
perspective starting from 1966-67. Staring
in 2020-21, debt charges began to increase dramatically because of both
increased debt (due to COVID) as well as rising interest rates to service the
debt and trend will continue. On the bright
side while the debt charge share of total spending is also rising and is
projected at 12 percent by 2029-30, it is well below the peaks attained during
the 1990s when nearly one third of every dollar of federal spending went to
service the debt.
Figure 3 also provides a long-term perspective on the net
debt both in nominal dollars as well as a share of GDP. The upward trajectory of the nominal debt
after 2018-19 is quite startling with the net federal debt expected to hit
1.798 trillion dollars by 2029-30. Indeed, the period from 2024-25 to 2029-30
will see $404 billion dollars added to the net debt representing over one fifth
of the total net debt accumulated in just six years.
Of course, all this spending is targeted at dealing with the
turbulent world we live in and is being justified as the big transformative
spending we need to build Canada’s economy in the face of global competition,
tariffs, and the erosion of our relationship with the United States. Ultimately, the payoff is supposed to be a
robustly growing and productive economy.
The next few years however see nominal GDP pretty much close to its historical
average of about 4 percent and even assuming population grows at a more
historic one percent annually, real per capita GDP is not poised to take off
any time soon.
Figure 4 plots real per capita GDP (deflated using the CPI
by the way) and its percent growth over the long term. Notice our productivity dilemma nicely summarized
by the long-term downward trend of the growth rate. Based on nominal GDP growth as forecast in
the budget, population growth at one percent annually and inflation at two percent,
real per capita GDP is projected to nudge upwards going forward from 2024-25. It is going to be a tough few years. It is a gamble to spend all this money with the long-term success predicated on the private sector joining in. Hopefully, it will work.
