Canada Fiscal Deficit over the years and What it says

Since Justin Trudeau took office as Prime Minister of Canada in November 2015, the nation’s fiscal policies and economic performance have come under intense scrutiny. Central to this analysis is the evolution of Canada’s fiscal deficit, a key indicator of economic health that reflects the gap between government revenues and expenditures. This journalistic piece provides a comprehensive timeline of Canada’s fiscal deficit trajectory from 2015 to his resignation in 2024, contextualizing the numbers with significant policy decisions, economic conditions, and global events.

2015-2016: A Shift in Fiscal Philosophy

When Justin Trudeau’s Liberal government came to power in late 2015, they inherited a fiscal framework marked by balanced budgets under the preceding Conservative government led by Stephen Harper. Trudeau’s platform, however, embraced a different approach—prioritizing economic stimulus through deficit spending.

The 2016 federal budget unveiled a deficit of CAD 29.4 billion, far exceeding the CAD 10 billion initially promised during the election campaign. This marked a deliberate shift to fund infrastructure projects and stimulate growth. Critics expressed concerns about abandoning balanced budget commitments, but the government argued that low interest rates justified borrowing to invest in Canada’s future. This era also saw the beginning of increased money supply, with the Bank of Canada implementing monetary easing measures to keep borrowing costs low.

2017-2019: Steady Deficits Amid Economic Growth

From 2017 to 2019, Canada experienced moderate economic growth, supported by a robust job market and rising consumer confidence. During this period, deficits hovered around the CAD 20 billion mark annually:

• 2017-2018: A deficit of CAD 19 billion.
• 2018-2019: A deficit of CAD 14 billion.

Key spending initiatives during this time included:

1. Canada Child Benefit (CCB): Introduced in 2016, the CCB provided direct financial support to families and was indexed to inflation in 2018, costing billions annually.
2. Infrastructure Investments: The Investing in Canada Plan aimed to modernize public transit, green infrastructure, and rural connectivity.
3. Expansion of CPP: The Canada Pension Plan enhancement required additional contributions but promised long-term benefits.

Critics noted that increased government spending led to higher money supply, raising concerns about potential inflationary pressures. However, the debt-to-GDP ratio remained stable, signaling that the economy was growing in proportion to government borrowing.

2020-2021: The COVID-19 Pandemic and Unprecedented Deficits

The COVID-19 pandemic presented an extraordinary challenge, prompting governments worldwide to respond with massive fiscal stimulus. Canada was no exception, as Trudeau’s government implemented sweeping measures to support individuals and businesses:

• Canada Emergency Response Benefit (CERB): Provided CAD 2,000 monthly to individuals affected by job loss or reduced hours.
• Canada Emergency Wage Subsidy (CEWS): Offered subsidies to businesses to retain employees.
• Canada Emergency Business Account (CEBA): Delivered interest-free loans to small businesses.

These programs, while essential, resulted in a historic fiscal deficit of CAD 327.7 billion in the 2020-2021 fiscal year. To finance these measures, the Bank of Canada significantly increased the money supply through quantitative easing, purchasing government bonds to stabilize the economy. This strategy injected liquidity into the market but raised fears of long-term inflation and devaluation of the Canadian dollar.

Canada’s debt-to-GDP ratio surged from 31% in 2019 to over 50% in 2020. While critics questioned the sustainability of such deficits, proponents emphasized the necessity of saving lives and livelihoods during a crisis. Economists noted that without these interventions, the economic downturn could have been far worse.'

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2022-2024: Post-Pandemic Recovery and New Challenges

As the pandemic subsided, the Trudeau government faced the dual challenge of fostering economic recovery while addressing inflationary pressures and rising interest rates. Key fiscal developments include:

• 2021-2022: The deficit shrank to CAD 90.2 billion as emergency spending tapered off and economic activity resumed.
• 2022-2023: The deficit narrowed further to CAD 36.4 billion, reflecting increased revenues from a rebounding economy.

However, the economic recovery was uneven, with inflation rates climbing to multi-decade highs due to supply chain disruptions, increased money supply, and global energy price shocks. The Bank of Canada responded with aggressive interest rate hikes, aiming to curb inflation but increasing the cost of servicing public debt.

New spending initiatives emerged, such as:

1. Dental Care Program: Part of the Liberal-NDP agreement, aiming to expand access to dental care for low-income Canadians.
2. Green Transition Investments: Billions allocated to achieve net-zero emissions by 2050, including subsidies for clean energy projects and electric vehicle infrastructure.

The 2023-2024 fiscal outlook projected a deficit of CAD 40 billion. Economists debated whether continued deficit spending was prudent, given the rising debt-servicing costs and ongoing inflationary pressures.

Canada’s total government net debt-to-GDP ratio stood at 33.2 per cent in 2021, according to the IMF. This is thelowest level among G7 countries, which the IMF estimates recorded an average net debt of 101.2 per cent of GDPin that same year.

Factors Influencing Canada’s Fiscal Deficit

Several overarching factors have shaped the trajectory of Canada’s fiscal deficit under Trudeau:

Global Economic Trends: Canada’s fiscal deficit has been significantly influenced by global events, such as the 2015-2016 oil price collapse, which reduced government revenues from energy exports. Similarly, the COVID-19 pandemic in 2020 caused unprecedented economic disruptions, necessitating large-scale government intervention.

Social Spending Policies: The introduction and expansion of programs like the Canada Child Benefit (CCB) and the Canada Pension Plan enhancement significantly increased government expenditures. While these policies aimed to reduce poverty and improve retirement security, they also contributed to structural deficits. For example, the CCB alone accounted for approximately CAD 23 billion annually by 2020.

Green Transition Goals: To combat climate change, the Trudeau government invested heavily in green infrastructure, clean energy subsidies, and electric vehicle incentives. These initiatives aligned with Canada’s commitments under the Paris Agreement but required substantial public funding. By 2023, the government had allocated over CAD 100 billion toward green initiatives.

Monetary Policy and Money Supply: The Bank of Canada’s quantitative easing measures during the pandemic increased the money supply by over CAD 300 billion. While this stabilized financial markets, it contributed to inflation rates exceeding 6% in 2022, impacting household affordability and increasing pressure on fiscal policy.

Healthcare Costs and Demographics: An aging population has driven up healthcare and pension costs. Healthcare spending rose to over CAD 300 billion annually by 2023, driven by rising demand for services and costly pharmaceutical innovations. Provinces required additional federal transfers to maintain services, adding to the federal deficit.

Trade and Economic Dependencies: Canada’s reliance on the U.S. as its primary trading partner exposed the economy to external shocks, including trade disputes and global supply chain disruptions. For example, the renegotiation of NAFTA into the USMCA created uncertainty, affecting revenue projections and fiscal planning.

Military and International Commitments:

Economists have raised concerns about the impact of increased defense spending on Canada’s fiscal health. Canada plans to raise its defense spending to 1.76% of GDP by 2030 and 2% by 2032, requiring an additional CAD 15 billion to CAD 20 billion over the next eight years. Pedro Antunes, chief economist at the Conference Board of Canada, highlighted that a gradual approach to meeting this goal would necessitate higher debt and interest payments, pushing Canada over its fiscal guardrails and making the situation precarious in upcoming budgets. Increasing taxes to meet this target is seen as politically challenging given declining public opinion for the Liberal government.

Last year, Finance Minister Chrystia Freeland adopted fiscal anchors to cap the deficit at CAD 40.1 billion, aiming to keep debt as a share of GDP declining beyond 2026-2027. Randall Bartlett, senior director of Canadian economics with Desjardins Group, warned that increased defense spending could violate these fiscal anchors unless significant cuts are made to other programs.

Business subsidies and the federal workforce have drawn scrutiny. Business subsidies increased by 140% under Trudeau’s tenure, while the federal workforce grew by 40%, consuming a larger portion of government spending. Economists like Craig Alexander and John Lester argue that eliminating or reducing these expenditures is necessary to sustain fiscal balance while meeting defense commitments.

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Tax Revenues and Policy Adjustments: While Canada maintained a progressive tax system, corporate tax revenues fluctuated due to changes in global economic conditions, tax competition, and policy shifts aimed at enforcing stricter compliance. For instance, during the Trudeau administration, measures such as increasing corporate tax rates for high-income companies and introducing stricter regulations on multinational corporations were implemented to address tax avoidance and evasion. These efforts added an estimated CAD 5 billion annually to government revenues by 2023. However, such measures faced considerable resistance from large corporations, which argued that these policies reduced competitiveness in the global market and discouraged foreign direct investment. Additionally, Canada’s fluctuating corporate tax revenues were influenced by industry-specific downturns, such as the oil and gas sector’s struggles during the 2015-2016 oil price collapse, which sharply reduced contributions from this key industry.

Conclusion

Justin Trudeau’s tenure, which concluded in 2024, leaves behind a complex fiscal legacy. The government’s approach to managing deficits reflects the challenges of governing during an era marked by economic volatility, global crises, and shifting policy priorities. The reliance on increased money supply and deficit spending has sparked debates about long-term fiscal sustainability and economic stability.

As Canada moves forward under new leadership, the debate over fiscal policy will remain central to the nation’s political and economic discourse, shaping its path in the years to come. Policymakers must navigate the delicate balance between supporting growth and ensuring fiscal responsibility to secure Canada’s economic future.

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