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Prime minister rejects ‘austerity’ despite massive debt and dismal economic growth

Published

10 months ago

5 minute read

From the Fraser Institute

By Grady Munro and Jake Fuss

Adjusting for population growth and inflation, the Trudeau government has recorded the five-highest years (2018-2022) of per-person spending in Canadian history, and is on track to record a sixth.

This week, at the Liberal cabinet retreat in Montreal, Prime Minister Justin Trudeau told reporters he’s against “austerity and cuts” and believes his government must “invest” to “create greater growth” in the economy, thus dashing hopes for any meaningful spending restraint in the upcoming federal budget.

But evidence shows the government’s current plan has not helped the economy despite the prime minister’s claims. Rather than double-down on a failed strategy of higher spending, taxes and borrowing, the Trudeau government should change direction immediately.

Let’s look at the evidence.

According to its latest fiscal projections, the federal government will spend $449.8 billion on programs and services in 2023/24—up 75.5 per cent (nominally) from 2014/15 when program spending was $256.2 billion. Adjusting for population growth and inflation, the Trudeau government has recorded the five-highest years (2018-2022) of per-person spending in Canadian history, and is on track to record a sixth. But have we seen a corresponding increase in economic growth?

No, in fact Canada has experienced an economic growth crisis for the last decade.

One of the best ways to measure economic growth is to use inflation-adjusted per-person gross domestic product (GDP), which provides the broadest measure of living standards for Canadians. According to a recent study by Philip Cross, former chief economic analyst at Statistics Canada, between 2013 and 2022 Canada’s per-person GDP (inflation-adjusted) grew at its slowest pace since the 1930s. Moreover, economic growth in Canada has fallen well behind growth in the United States, showing that Canada’s stagnation was not inevitable.

And there’s little room for optimism. According to OECD estimates, Canada will have the slowest growth in per-person GDP among advanced economies from 2020 to 2030 and 2030 to 2060.

Simply put, the data show that increased government spending has not produced greater prosperity for Canadians.

Indeed, rather than “invest” in Canadians, the Trudeau government has burdened Canadians with mountains of debt. The Trudeau government has yet to balance the budget, despite campaign promises, and this year will likely run its ninth consecutive deficit. Nearly a decade of uninterrupted deficits has increased the federal debt by $941.9 billion. This not only imposes costs on Canadians today—primarily through higher debt interest costs—but also increases the tax burden on future generations who are ultimately responsible for paying off today’s debt.

If the Trudeau government needs a blueprint for reform, it can find it within its own party, which has a history of spending reductions and strong economic growth.

During the mid-1990s, the Chrétien Liberal government introduced meaningful spending reductions that ultimately balanced the federal budget in 1997, marking the first federal budget surplus in nearly 30 years. In addition to spending reductions, the Chrétien government also introduced tax relief and other growth-enhancing policies. And the results were immediate.

Between 1997 and 2007, Canada’s average annual increase in per-person GDP (inflation-adjusted) was 2.2 per cent, which was higher than the OECD average. During the same time period, Canada’s average rate of employment growth was nearly double the average in the OECD and the United States. And the national poverty rate fell from 7.8 per cent in 1996 to 4.9 per cent in 2004. Overall, the Canadian economy outperformed many other industrialized economies during this time and living standards improved for Canadians—despite reductions in government spending.

Despite claims by Prime Minister Trudeau, less government spending (not more) is necessary to help reverse the trend of stagnant economic growth. The Trudeau government should recognize that the current plan isn’t working and change course in its upcoming budget.

Authors:

Grady Munro
Policy Analyst, Fraser Institute
Jake Fuss
Director, Fiscal Studies, Fraser Institute
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Alberta

Alberta’s fiscal update projects budget surplus, but fiscal fortunes could quickly turn

Published on November 21, 2024

By

From the Fraser Institute

By Tegan Hill

According to the recent mid-year update tabled Thursday, the Smith government projects a $4.6 billion surplus in 2024/25, up from the $2.9 billion surplus projected just a few months ago. Despite the good news, Premier Smith must reduce spending to avoid budget deficits.

The fiscal update projects resource revenue of $20.3 billion in 2024/25. Today’s relatively high—but very volatile—resource revenue (including oil and gas royalties) is helping finance today’s spending and maintain a balanced budget. But it will not last forever.

For perspective, in just the last decade the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and as high as $25.2 billion (2022/23).

And while the resource revenue rollercoaster is currently in Alberta’s favor, Finance Minister Nate Horner acknowledges that “risks are on the rise” as oil prices have dropped considerably and forecasters are projecting downward pressure on prices—all of which impacts resource revenue.

In fact, the government’s own estimates show a $1 change in oil prices results in an estimated $630 million revenue swing. So while the Smith government plans to maintain a surplus in 2024/25, a small change in oil prices could quickly plunge Alberta back into deficit. Premier Smith has warned that her government may fall into a budget deficit this fiscal year.

This should come as no surprise. Alberta’s been on the resource revenue rollercoaster for decades. Successive governments have increased spending during the good times of high resource revenue, but failed to rein in spending when resource revenues fell.

Previous research has shown that, in Alberta, a $1 increase in resource revenue is associated with an estimated 56-cent increase in program spending the following fiscal year (on a per-person, inflation-adjusted basis). However, a decline in resource revenue is not similarly associated with a reduction in program spending. This pattern has led to historically high levels of government spending—and budget deficits—even in more recent years.

Consider this: If this fiscal year the Smith government received an average level of resource revenue (based on levels over the last 10 years), it would receive approximately $13,000 per Albertan. Yet the government plans to spend nearly $15,000 per Albertan this fiscal year (after adjusting for inflation). That’s a huge gap of roughly $2,000—and it means the government is continuing to take big risks with the provincial budget.

Of course, if the government falls back into deficit there are implications for everyday Albertans.

When the government runs a deficit, it accumulates debt, which Albertans must pay to service. In 2024/25, the government’s debt interest payments will cost each Albertan nearly $650. That’s largely because, despite running surpluses over the last few years, Albertans are still paying for debt accumulated during the most recent string of deficits from 2008/09 to 2020/21 (excluding 2014/15), which only ended when the government enjoyed an unexpected windfall in resource revenue in 2021/22.

According to Thursday’s mid-year fiscal update, Alberta’s finances continue to be at risk. To avoid deficits, the Smith government should meaningfully reduce spending so that it’s aligned with more reliable, stable levels of revenue.

Author:

Tegan Hill
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Alberta

Alberta fiscal update: second quarter is outstanding, challenges ahead

Published on November 21, 2024

By

Alberta maintains a balanced budget while ensuring pressures from population growth are being addressed.

Alberta faces rising risks, including ongoing resource volatility, geopolitical instability and rising pressures at home. With more than 450,000 people moving to Alberta in the last three years, the province has allocated hundreds of millions of dollars to address these pressures and ensure Albertans continue to be supported. Alberta’s government is determined to make every dollar go further with targeted and responsible spending on the priorities of Albertans.

The province is forecasting a $4.6 billion surplus at the end of 2024-25, up from the $2.9 billion first quarter forecast and $355 million from budget, due mainly to higher revenue from personal income taxes and non-renewable resources.

Given the current significant uncertainty in global geopolitics and energy markets, Alberta’s government must continue to make prudent choices to meet its responsibilities, including ongoing bargaining for thousands of public sector workers, fast-tracking school construction, cutting personal income taxes and ensuring Alberta’s surging population has access to high-quality health care, education and other public services.

“These are challenging times, but I believe Alberta is up to the challenge. By being intentional with every dollar, we can boost our prosperity and quality of life now and in the future.”

Nate Horner, President of Treasury Board and Minister of Finance

Midway through 2024-25, the province has stepped up to boost support to Albertans this fiscal year through key investments, including:

  • $716 million to Health for physician compensation incentives and to help Alberta Health Services provide services to a growing and aging population.
  • $125 million to address enrollment growth pressures in Alberta schools.
  • $847 million for disaster and emergency assistance, including:
    • $647 million to fight the Jasper wildfires
    • $163 million for the Wildfire Disaster Recovery Program
    • $5 million to support the municipality of Jasper (half to help with tourism recovery)
    • $12 million to match donations to the Canadian Red Cross
    • $20 million for emergency evacuation payments to evacuees in communities impacted by wildfires
  • $240 million more for Seniors, Community and Social Services to support social support programs.

Looking forward, the province has adjusted its forecast for the price of oil to US$74 per barrel of West Texas Intermediate. It expects to earn more for its crude oil, with a narrowing of the light-heavy differential around US$14 per barrel, higher demand for heavier crude grades and a growing export capacity through the Trans Mountain pipeline. Despite these changes, Alberta still risks running a deficit in the coming fiscal year should oil prices continue to drop below $70 per barrel.

After a 4.4 per cent surge in the 2024 census year, Alberta’s population growth is expected to slow to 2.5 per cent in 2025, lower than the first quarter forecast of 3.2 per cent growth because of reduced immigration and non-permanent residents targets by the federal government.

Revenue

Revenue for 2024-25 is forecast at $77.9 billion, an increase of $4.4 billion from Budget 2024, including:

  • $16.6 billion forecast from personal income taxes, up from $15.6 billion at budget.
  • $20.3 billion forecast from non-renewable resource revenue, up from $17.3 billion at budget.

Expense

Expense for 2024-25 is forecast at $73.3 billion, an increase of $143 million from Budget 2024.

Surplus cash

After calculations and adjustments, $2.9 billion in surplus cash is forecast.

  • $1.4 billion or half will pay debt coming due.
  • The other half, or $1.4 billion, will be put into the Alberta Fund, which can be spent on further debt repayment, deposited into the Alberta Heritage Savings Trust Fund and/or spent on one-time initiatives.

Contingency

Of the $2 billion contingency included in Budget 2024, a preliminary allocation of $1.7 billion is forecast.

Alberta Heritage Savings Trust Fund

The Alberta Heritage Savings Trust Fund grew in the second quarter to a market value of $24.3 billion as of Sept. 30, 2024, up from $23.4 billion at the end of the first quarter.

  • The fund earned a 3.7 per cent return from July to September with a net investment income of $616 million, up from the 2.1 per cent return during the first quarter.

Debt

Taxpayer-supported debt is forecast at $84 billion as of March 31, 2025, $3.8 billion less than estimated in the budget because the higher surplus has lowered borrowing requirements.

  • Debt servicing costs are forecast at $3.2 billion, down $216 million from budget.

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