The Road Ahead: Pictures of Federal Budget 2025

 

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.

Federal Platforms, Costing and Fiscal Sustainability

 

The two main federal parties have released their platforms and costing and inevitability the question of whether their fiscal programs are sustainable emerges.  Trevor Tombe at The Hub has already weighed in on the Liberal platform and notes that it “marks a clear break from the government’s previous approach to fiscal policy and proposes to move Canada onto a less sustainable track.” The Liberal Platform essentially adds $225 billion in deficits to Federal debt.  More specifically, Tombe notes that: “marks a clear break from the government’s previous approach to fiscal policy and proposes to move Canada onto a less sustainable track.”  The Conservatives have also released their platform with costing and they have no plans to balance the budget either and will be adding about $100 billion to the federal debt over the next four years. 

The question that arises is whether these additions to the federal debt will make federal finances unsustainable.  The answer to this is of course dependent on what your definition of sustainability is and what the growth rate of the economy is projected to be.  The latter is a big uncertain variable given that there is trade upheaval underway with the United States and much of the increase in projected spending deals with addressing the trade upheaval and associate issues such as national security.  As for the definition of sustainability, it depends. If your benchmark for sustainability is a good credit rating on federal debt and being able to meet the debt service costs relatively easily, then both platforms are easily sustainable for the foreseeable future.

However, public finance economists have a somewhat more discerning measure that is tied to the debt to GDP ratio.  In other words, if the debt to GDP ratio is flat or falling, then the fiscal course of the public finances is sustainable.  On the other hand, if it is rising, then it is not sustainable.  So, to examine sustainability using these measures, Figures 1 and 2 plot three scenarios (Baseline taken from the Liberal Platform, the Liberal Platform and Conservative Platform). I am going to take all their numbers at face value and not get into whether projected revenues or cost savings are realistic. Having said that, the results are dependent on the rate of growth of GDP.  For each scenario, the deficits going forward from 2025-26 to 2028-29 are added to federal net debt with 2024-25 set at $1.396 trillion. Meanwhile, GDP in 2024-25 is set at 3.173 trillion. 

Going forward, the growth rates for GDP are one of two scenarios.  Figure 1 plots the estimates with an assumption of nominal GDP growth annually at 4 percent.  This is a relatively optimistic scenario all things given but not unreasonable even in the wake of the recent IMF revisions to their forecasts which reduced Canadian real GDP growth for the next two years to 1.4 and 1.6 percent.  If inflation stays at 2 percent, we are looking at nominal growth ranging from 3.4 to 3.6 percent. Figure 2 however, reduces nominal GDP growth to 3 percent annually going forward and  at 2 percent inflation yjis translates to 1 percent real annual growth. 

 

 

The results show that at 4 percent nominal GDP growth, the Baseline and Conservative platform paths both show a declining net debt to GDP ratio.  The Liberal platform at 4 percent growth is essentially stable for the next couple of years and then turns down ever so slightly.  Of the three scenarios, one would expect the Liberal platform is the one that is most sensitive to lower GDP growth and that is indeed borne out in Figure 2.  With 3 percent growth, the baseline scenario reveals at upward shift in the net debt to GDP ratio for 2025-26 and then a decline making it sustainable going forward.  The Conservative net debt to GDP ratio remains on a downward trend even with lower growth.  However, the Liberal net debt to GDP ratio going forward is clearly not on a sustainable path going forward though one may of course quibble that going from 44 to 45.4 percent over five years is hardly the end of the world.  However, should there be a recession later this year and into next year, all these scenarios will be worse.

 

 

So, it appears that even with all the spending being proposed, the federal public finances do not appear to be on a widely out of control path going forward whatever party forms the government. However, strictly speaking, some scenarios based on these assumptions are more sustainable than others.

Ontario’s Finances: A Quick Review of the November 6th Fiscal Statement

The 2019 Ontario Fall Economic and Fiscal statement was delivered by finance minister Rod Phillips today and the basic message is that the deficit is down from the 2019 budget projection but spending on government priorities is up - notably in health and education.  Compared to last spring, this is a “good news” statement and the outcome of a process of retreat that has marked the Ford Government over the last six months given the outcry from a number of directions that restored among other things, funding for autism programs and a new French language university. 

Revenue growth is greater than anticipated, given Ontario’s booming economy and this has allowed for a smaller deficit as well as more spending.  The deficit is now projected to be $9 billion which is down from the original budget estimate of $10.3 billion – but based on interim numbers had already come down to $9.3 billion. 

Based on the interim numbers since the budget, spending is up from $163.4 billion to $164.8 billion (which incidentally includes a $1 billion reserve) billion but revenues are up $154.2 billion to $155.761 billion.  Revenues are basically about $1.5 billion dollars more than anticipated while total spending including the reserve has gone up by about $1.4 billion.  So, the deficit is lower than what was both in the budget and in the interim update but at $9 billion, it is still the largest deficit since 2014-15 when it stood at $11.268 billion.  Moreover, it is expected to decline to $6.7 billion in 2020-21 and $5.4 billion by 2021-22. As a result, the net debt will rise though the net debt to GDP ratio will stay flat at about 40 percent.  Nevertheless, the net debt but is expected to be $353.7 billion – up from $338.5 billion in 2018-19.

So, based on the 2018-19 numbers, by 2021-22, revenues will have grown by $11.7 billion – an increase of 7.6 percent - while total expenditures will grow by $9.7 billion – an increase of 6 percent.  So, the plan is essentially to slow expenditure growth and wait for revenues to catch up which is a traditional approach used by Ontario governments before this one.  Revenues in 2019-20 are definitely up with CIT revenue $936 million higher and PIT $525 million higher than anticipated.  As well, if the government holds the line on further spending, the reserve will likely be applied to the bottom line allowing the 2019-20 deficit to come in at closer to $8 billion. 

Nevertheless, despite all the cries of austerity, it would appear that its business as usual in Ontario given the “grow your way out of deficits” approach that is being used – again.