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Spending sprees by governments across Canada help fuel inflation and high interest rates

Published

12 months ago

4 minute read

From the Fraser Institute

By Jake Fuss and Grady Munro

While the prime minister and many premiers justified their high spending levels during the pandemic as merely a temporary development, the federal government and seven provincial governments still plan to run budget deficits this year

Earlier this year, premiers in Ontario, British Columbia, and Newfoundland and Labrador wrote  letters to Tiff Macklem, Governor of the Bank of Canada, cautioning against further interest rate hikes, citing the potential negative effects on residents including homeowners with mortgages. But instead of blaming the central bank, Canadian premiers—and the prime minister—should stop their spending sprees, which help fuel inflation and increase interest rates.

Indeed, when governments increase spending, particularly when financed by debt, they add more money to the economy and can help fuel inflation. And high rates of government spending put pressure on the Bank of Canada to maintain interest rates at current levels, or even hike the rate further, to counteract inflation. According to a recent report from Scotiabank, government spending has contributed significantly to higher interest rates in Canada, accounting for an estimated 42 per cent of the increase in the Bank of Canada’s rate since the first quarter of 2022.

Yet the spending sprees continue.

While the prime minister and many premiers justified their high spending levels during the pandemic as merely a temporary development, the federal government and seven provincial governments still plan to run budget deficits this year. Government spending across the country remains at elevated levels or, in some cases, even increased beyond pandemic levels.

Ontario is a prime example. Provincial program spending (total spending minus interest costs) will reach an estimated $193.0 billion in 2023/24—$24.0 billion more than at the peak of COVID. Debt interest costs have also grown due to debt accumulation and rising interest rates.

Despite a considerable increase in revenue over recent years, the Ford government had planned for a $1.3 billion deficit in its spring budget. By November, the government increased spending again and quadrupled the projected deficit to $5.6 billion.

Similarly, British Columbia outlined plans in February to increase program spending and run a $4.2 billion deficit while adding $13.1 billion in debt to the books this year. Just over a half-year later, the B.C. government increased spending again and the deficit was revised to $5.6 billion with debt rising by $14.0 billion instead of $13.1 billion.

Prime Minister Trudeau and his government followed a similar path. According to the recent federal fiscal update, between 2024/25 and 2027/28, the government has increased projected spending by $30.7 billion more than previously forecasted.

According to projections, only two provinces (Alberta and New Brunswick) will run budget surpluses this year, but in Alberta this is largely due to elevated resource revenues stemming from high commodity prices rather than any significant spending restraint. If resource revenues declined to historical average levels, the Smith government in Alberta would likely run deficits similar to other provinces.

Simply put, the excessive spending habits of many premiers and the prime minister are a big reason why interest rates have climbed and inflation remains sticky.

If Canadian politicians want to help tame inflation and bring down interest rates, they should look in the mirror for solutions and show leadership. Complaining about elevated interest rates helps no one, but ensuring fiscal policy is rowing in the same direction as monetary policy would be a good start.

Authors:

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

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Chainsaws and Scalpels: How Governments Choose

Published on November 17, 2024

By

The Audit

 David Clinton

Javier Milei in Argentina, Musk and Ramaswamy in the US.. What does DOGE in Canada look like?

Under their new(ish) president Javier Milei, Argentina cut deeply and painfully into their program spending to address a catastrophic economic crisis. And they seem to have enjoyed some early success. With Elon Musk now primed to play a similar role in the coming Trump administration in the U.S., the obvious question is: how might such an approach play out in Canada?

Sure. We’re not suffering from headaches on anything like the scale of Argentina’s – the debt we’ve run up so far isn’t in the same league as the long-term spending going on in South America. But ignoring the problems we do face can’t be an option. Given that the annual interest payments on our existing national debt are $11.7 billion (which equals seven percent of total expenditures), simply balancing the budget won’t be enough.

The underlying assumption powering the question is that we live in a world of constraints. There just isn’t enough money to buy everything we might want, so we need to both prioritize and become more efficient. It’s about figuring out what can no longer be justified – even if it does provide some value – and what’s just plain wasteful.

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Some of this may seem obvious. After all, when there are First Nations reserves without clean water and millions of Canadians without access to primary care physicians, how can we justify spending hundreds of millions of dollars funding arts projects that virtually no one will ever discover, much less consume?

Apparently not everyone sees things that way. Large governments operate by reacting to political, social, and chaos-driven incentives. Sometimes those incentives lead to rational choices, and sometimes not. But mega-sized organizations tend to lack the self-awareness and capacity to easily change direction.

And some basic problems have no obvious solutions. As I’ve written, there’s a real possibility that all the money in the world won’t buy the doctors, nurses, and integrated systems we need. And “all the money in the world” is obviously not on the table. So the well-meaning bureaucrat might conclude that if you’re not going to completely solve the big problems, you might as well try to manage them while investing in other areas, too.

Still, I think it’s worth imagining how things might look if we could launch a comprehensive whole-of-government program review.

How Emergency Cuts Might Play Out

Imagine the federal government defaulted on its debt servicing payments and lost access to capital markets. That’s not such an unlikely scenario. There would suddenly be a lot less money available to spend, and some programs would have to be shut down. Protecting emergency and core services would require making fast – and smart – decisions.

We would need to take a long, hard look at this important enumeration of government expenditures. There probably wouldn’t be enough time to bridge the gap by looking for dozens of less-critical million-dollar programs. We would need to find some big-ticket items fast.

Our first step might be to pause or restructure larger ongoing payments, like projects funded through the Canada Infrastructure Bank (total annual budget: $3.45 billion). Private investors might pick up some of the slack, or some projects could simply go into hibernation. “Other interest costs” (total annual budget: $4.6 billion) could also be restructured.

Reducing equalization payments (total annual budget: $25.2 billion) and territorial financing (total budget: $5.2 billion) might also be necessary. This would, of course, spark parallel crises at lower levels of government. Similarly, grants to settle First Nations claims (total budget: $6 billion) managed by Crown-Indigenous Relations and Northern Affairs Canada would also be at least temporarily cut.

All that would be deeply painful and trigger long-term negative consequences.

But there’s a far better approach that could be just as effective and a whole lot less painful:

What an All-of-Government Review Might Discover

Planning ahead would allow you the luxury of targeting spending that – in some cases at least – wouldn’t even be missed. Think about programs that were announced five, ten, even thirty years ago, perhaps to satisfy some passing fad or political need. They might even have made sense decades ago when they were created…but that was decades ago when they were created.

Here’s how that’ll work. When you read through the program and transfer spending items on that government expenditures page (and there are around 1,200 of those items), the descriptions all point to goals that seem reasonable enough. But there are some important questions that should be asked about each of them:

  • When did these programs begin?
  • What specific activities do they involve?
  • What have they accomplished over the past 12 months?
  • Is their effectiveness trending up or down?
  • Are they employing efficiency best-practices used in the private sector?
  • Who’s tasked with monitoring changes?
  • Where are their reports published?

To show you what I mean, here are some specific transfer or program line items and their descriptions:

Department of Employment and Social Development

  • Workforce Development Agreements ($722 million)
  • Indigenous Early Learning and Child Care Transformation Initiative ($374 million)
  • Payments to provinces, territories, municipalities, other public bodies, organizations, groups, communities, employers and individuals for the provision of training and/or work experience, the mobilization of community resources, and human resource planning and adjustment measures necessary for the efficient functioning of the Canadian labour market ($856 million)

Department of Industry

  • Contributions under the Strategic Innovation Fund ($2.4 billion)

Department of Citizenship and Immigration

  • Settlement Program ($1.13 billion)

Department of Indigenous Services

  • Contributions to provide income support to on-reserve residents and Status Indians in the Yukon Territory ($1.05 billion). Note that, as of the 2021 Census, there were 9,150 individuals with North American Indigenous origins in Yukon. Assuming the line item is accurately described, that means the income support came to $114,987/person (not per household; per person).

Each one of those (and many, many others like them) could be case studies in operational efficiency and effectiveness. Or not. But there’s no way we could know that without serious research.

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Business

DOGE seeks ‘super high-IQ’ people willing to work 80 hours a week for free

Published on November 17, 2024

By

From The Center Square

By 

President-elect Donald Trump’s new Department of Government Efficiency is seeking “super high-IQ” people to work more than 80 hours a week for free.

DOGE co-leader Elon Musk, who is the CEO of Tesla and is one of the richest people in the world, is working with entrepreneur Vivek Ramaswamy to find top talent to cut wasteful spending, overburdensome regulations and re-structure federal agencies. Neither Musk or Ramaswamy will be paid for their work.

“We are very grateful to the thousands of Americans who have expressed interest in helping us at DOGE,” the new advisery group said in a social media post. “We don’t need more part-time idea generators. We need super high-IQ small-government revolutionaries willing to work 80+ hours per week on unglamorous cost-cutting.”

Candidates can send their resumes to the DOGE account on X.

“Elon & Vivek will review the top 1% of applicants,” according to the post.

In a separate post, Musk said the work will be challenging and won’t be paid.

“Indeed, this will be tedious work, make lots of enemies & compensation is zero,” Musk wrote.

The department’s acronym, DOGE, is a nod to Musk’s favorite cryptocurrency, dogecoin. Trump said the new group will pave the way for his administration to “dismantle government bureaucracy, slash excess regulation, cut wasteful expenditures and restructure federal agencies.”

Trump laid out lofty goals for DOGE in his announcement this week.

“It will become, potentially, ‘The Manhatten Project,’ of our time,” Trump’s announcement said. “Republican politicians have dreamed about the objectives of ‘DOGE’ for a very long time.”

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said the group welcomes DOGE to the challenge.

“Given our cumbersome bureaucracy and large fiscal imbalances, the effort is long overdue,” she said. “Regardless of political views, we should all want the federal government to spend scarce dollars wisely.”

MacGuineas said the outside group’s work could help restore trust in the government.

“An aggressive effort to reduce waste, fraud, abuse, and inefficiencies could save billions or even trillions of dollars over a decade and could help improve the public’s faith in government,” she said.

MacGuineas urged DOGE to look at the full budget.

“Such an effort should look at all parts of the budget, especially in the areas of health care, national defense, and spending through the tax code, and it should look beyond just cutting fraud and reducing bureaucracy to also identify places where the taxpayer is not getting the best value for their dollar,” she said. “Federal health care spending, in particular, is rife with overpayments and inefficiencies that offer the opportunity to substantially lower costs without meaningfully reducing quality or access to care.”

Social Security and federal health care programs, specifically Medicare, deserve special attention, MacGuineas said.

Since fiscal year 2003, improper payment estimates by executive branch agencies have totaled about $2.7 trillion, including $236 billion for fiscal year 2023. Improper payments have declined in recent years, but remain a stubborn challenge for many federal agencies. Improper payments are payments that shouldn’t have been made or were made in the wrong amount.

Most of the improper payments come from five federal programs: Medicare, comprising three programs ($51 billion); Medicaid ($50 billion); the Department of Labor’s Unemployment Insurance – Federal Pandemic Unemployment Assistance ($44 billion); the Department of the Treasury’s Earned Income Tax Credit ($22 billion); the Small Business Administration’s (SBA) Paycheck Protection Program Loan Forgiveness ($19 billion).

MacGuineas said DOGE should take a bipartisan outlook.

“Importantly, the process will need to be as bipartisan as possible in order to help with the deliverability and implementation of ideas,” she said. “The recommendations will need Congressional buy-in, further emphasizing the need for this to be an effort reaching across the aisle and leaving all options on the table to address our fiscal imbalances.”

Congress has run a deficit every year since 2001. In the past 50 years, the federal government has ended with a fiscal year-end budget surplus four times, most recently in 2001.

DOGE also plans to go after fraud at the federal level. The Government Accountability Office, which serves as the research arm of Congress, estimated fraud losses cost taxpayers between $233 billion and $521 billion annually, in a report in April. The fraud estimate’s range represents 3% to 7% of average federal obligations.

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