Yesterday’s federal budget – the first in two years – made up for lost time and came in at a hefty 724 pages. With total expenditure in 2021-22 projected at $497.6 billion, that works out to about $687 million of spending per page. The budget theme was essentially a long-term recovery plan for jobs, growth and resilience to finish the job against COVID-19 but it is not so much spending to drive economic growth as it is spending designed as a platform for the next election. The government is gambling the public is ready for a larger government and has provided initiatives targeted to families, seniors and assorted other interests. In many respects, if you look hard enough, there is something for almost everyone, but it is very often a case of what the governing party thinks you should have. A case in point is post-secondary education where there is more money being provided for specific initiatives in technology/life sciences research but not for basic research. The Liberal Party’s vision for the future is one of bigger government but also one that is more directive.
For 2020-21, total spending, the tally came in at revenues of $296.2 billion, expenditures of $634.9 billion and a deficit of $354.3 billion – down from projections of nearly $400 billion. Believe it or not, Finance Minister Freeland was on the news stating something to the effect that this was an accomplishment and that the government had saved the taxpayers money by bringing in only a $354 billion deficit. For 2021-22, revenues are expected to rise 20 percent as the economy recovers reaching $355.1 billion and spending will fall 21 percent going to $497.6 billion.
The deficit to GDP ratio goes from 16 percent in 2020-21 to 6 percent this fiscal year. However, the net debt rises to $1.333 trillion this fiscal year and by 2025 is expected to reach $1.5 trillion – nearly doubling from what it was in 2019. However, the net debt to GDP will peak at 55 percent and then decline slightly thereafter because the economy is on fire this year with real GDP growth of seven percent this year and 4 percent next year. However, despite this being a budget for long-term growth, according to the forecasts, real GDP growth reverts to the moribund two percent rate by 2024.
COVID-19 spending in 2020-21 was $264.6 billion and much of that will go in 2021-22 even with continuation of assorted supports and only amount to $71.9 billion. However, the government is bringing in $101 billion in new spending over the next three years with the bulk front ended this fiscal year which means there will be about $50 billion in new spending this year. Indeed, there is a permanent increase in spending being put into place and by 2025, federal government spending will be about one third higher than it was in 2019.
There is $30 billion over five years for $10 a day national day care. However, this requires matching 50/50 financial participation from Ottawa and the provinces and given that the provinces have always felt they were burned by a promise of 50/50 funding for Medicare and health transfers that ultimately vanished, you can be sure they will not agree unless there is more money. Incidentally, health transfers are not going up this budget. There is also money for long-term care, a ten percent increase in Old Age Security for seniors, millions for entrepreneurship, life science research, indigenous affairs, tourism, regional economic development (there is more money for FEDNOR), and the list goes on.
The government is not concerned about the deficit or the debt. Indeed, there is no plan for balancing the budget in the medium or long-term. It is hoping to grow its way out of any fiscal problem. As long as interest rates remain low and there is no recession, it will probably get its wish. However, given the economy has apparently done better than expected, why is so much stimulus – sorry, investment in the future – needed? Interest rates are low fueling a housing frenzy. Canadians have accumulated a large pool of savings – over $100 billion – during the pandemic that they will be looking to spend. Permanently boosting federal spending by one-third is really adding fuel to the fire. Even the $30 billion child-care plan is in the end potentially a source of stimulus. After all, given that some families are spending between $1,000 to $2000 a month for child-care, a $10 a day child-care plan frees up thousands of dollars a year for spending on other things – probably housing. The economy is going to be awash in money but supply of just about everything seems to be limited. It does sound like a recipe for demand side inflation.
