With the 2026 Federal Budget out, it is time for a quick
overview. The “Masters of Our
Destiny” budget lays out as its main theme a spending program designed to create an
investment super cycle via a productivity mega deduction, an entrepreneurship
capital gains reinvestment incentive, and a billion-dollar strategic response fund
for large scale research and development projects. Time will tell as to its success. There is a lot in the budget, but a survey of the
main fiscal indicators provides one with a pretty good indication of where we
are headed fiscally. In brief, from
2025/26 to 2030/31, total revenues are projected to rise from $526.4 billion to
$629.1 billion, program spending will rise from $489.5 billion to $600.2
billion, while total spending will rise from $565.5 billion to $682 billion.
Figure 1 plot the key expenditure and revenue variables
going back to the 2014/15 fiscal year and they show that by 2030/31, total federal
spending will surpass the peak set during the COVID-19 pandemic. The good news
is that according to these numbers, total revenues will more than cover program
spending by 2030/31. The bad news is
that once debt charges are factored into the mix, total spending and total
revenues are embarked on upward parallel paths that show no prospect of
intersection. We are looking at a long and sustained period of deficits and
subsequent increases in both the net debt and debt charges. Indeed, the net debt is expected to rise from
$1.45 trillion in 2025/26 to $1.9 trillion by 2030/31.
Figure 2 plots the annual average growth rates of the key indicators
mentioned. The good news is that the
average annual growth rate of total revenue going forward matches that of
program spending and is only slightly below that of total expenditure. The bad news is that of these five
indicators, the fastest growing are debt charges and the net debt at 8.2 and
5.5 percent respectively. How can that
be? As a result of separating out
capital spending from operating spending, the additions to the net debt far
exceed the accumulated deficit. The
rising stock of debt in turn is generating larger debt service costs that by
2030/31 are expected to total nearly $85 billion annually and account for about
13 percent of federal revenues.Of course, if interest rates rise more than expected, we are looking at interesting times.
