Federal government keeps violating self-imposed fiscal rules

By continually violating its own fiscal anchor, the Trudeau government has rendered the rule meaningless and abandoned the discipline it’s meant to impose.

Last week, after tabling the Trudeau government’s fall fiscal update, which includes evermore spending and borrowing, Finance Minister Chrystia Freeland called it a “responsible fiscal plan.” Upon closer scrutiny, however, the finance minister has once again abandoned her self-imposed fiscal rules and continues to spend, borrow and tax at unsustainable levels.

Fiscal rules, also known as “fiscal anchors,” help guide policy on government spending, taxes and borrowing. They’re supposed to prevent a deterioration in government finances, with an eye on ensuring debt is sustainable for future generations.

After taking office in 2015, the Trudeau government announced its fiscal anchor—balance the budget by fiscal year 2019-20. When the government quickly realized it would not achieve this goal, it dropped a new fiscal anchor—reduce Canada’s debt-to-GDP ratio, a common measure of a country’s ability to pay back its debt. However, the 2019 fall fiscal update revealed the government had violated its new fiscal anchor before the pandemic, as debt-to-GDP ticked up slightly from 30.8 to 31.0 per cent. In other words, federal debt grew slightly faster than the Canadian economy.

Then the government spent and borrowed hundreds of billions during COVID, driving debt-to-GDP up to 47.2 per cent in 2020-21. Afterwards, as the economy rebounded, the ratio levelled off and stabilized around 42 per cent in 2022-23.

Last week, Minister Freeland indicated the government will violate its own fiscal anchor at least two more times—debt-to-GDP will increase to 42.4 per cent in 2023-24 then climb higher in 2024-25. Again, federal debt is growing faster than the Canadian economy.

By continually violating its own fiscal anchor, the Trudeau government has rendered the rule meaningless and abandoned the discipline it’s meant to impose. There’s little direction for federal finances and almost nothing to ensure the government is disciplined with spending and debt growth. In such a scenario, politics—not responsible fiscal principles—governs decisions over the public purse.

So, what are the consequences to this wholly undisciplined approach to fiscal policy?

All else equal, a rising debt-to-GDP ratio means that debt interest costs will rise relative to the size of the economy. Spending on rising debt interest costs will divert money away from government programs and/or crowd out any fiscal room for tax relief for Canadian families.

And debt interest costs are rising rapidly. In 2020/21, when interest rates were at historic lows, the federal government spent $20.4 billion on debt interest. This year, interest costs will reach a projected $46.5 billion, more than double what they were three years ago. And will hit a projected $60.7 billion by 2028/29—double what the government plans to spend on employment insurance benefits that year.

Finally, according to last week’s fiscal update, debt-to-GDP will begin to decline after 2024/25, but this should be taken with a huge grain of salt since this government has consistently increased spending and debt beyond its original projections. And there’s nothing preventing the government from scrapping these commitments like they have with all their other fiscal anchors. Given the government’s clear preference for spending financed by borrowing, our debt-to-GDP ratio will likely continue to grow.

Unfortunately, there are few signs the Trudeau government will transform into a responsible steward of public finances and take meaningful steps to control debt and debt interest costs. And of course, Canadian taxpayers will pay the price.

Authors:

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Grady Munro

Junior Policy Analyst, Fraser Institute

Related Topics:#BallancedBudget #ChrystiaFreeland #DebtToGDPRatio #FederalDebt #FraserInstitute #GradyMunro #JakeFuss

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In this episode of the Macdonald-Laurier Institute’s Inside Policy Talks podcast, Senior Fellow and National Security Project Lead Alex Dalziel explores the underreported issue of trade-based money laundering (TBML) with Dr. Jamie Ferrill, the head of financial crime studies at Charles Sturt University in Canberra, Australia and a former Canada Border Services Agency officer.

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A Pervasive Problem: TBML is challenging to detect due to the vast scale and complexity of global trade, making it an attractive channel for organized crime groups. Although global estimates are imprecise, the Financial Action Task Force and The United Nations Office on Drugs and Crime (UNODC) suggests 2-5% of GDP could be tied to money laundering, representing trillions of dollars annually. In Canada, this could mean over $70 billion in potentially laundered funds each year. Despite the scope of TBML, Canada has seen no successful prosecutions for criminal money laundering through trade, highlighting significant gaps in identifying, investigating and prosecuting these complex cases.

Canada’s Vulnerabilities: Along with the sheer volume and complexity of global trade, Canada’s vulnerabilities stem from gaps in anti-money laundering regulation, particularly in high-risk sectors like real estate, luxury goods, and legal services, where criminals exploit weak oversight. Global trade exemplifies the vulnerabilities in oversight, where gaps and limited controls create substantial opportunities for money laundering. A lack of comprehensive export controls also limits Canada’s ability to monitor goods leaving the country effectively. Dr. Ferrill notes that “If we’re seen as this weak link in the process, that’s going to have significant implications on trade partnerships,” underscoring the potential political risks to bilateral trade if Canada fails to address these issues.

International and Private Sector Cooperation: Combating TBML effectively requires strong international cooperation, particularly between Canada and key trade partners like the U.S. The private sector—including freight forwarders, customs brokers, and financial institutions—plays a crucial role in spotting suspicious activities along the supply chain. As Dr. Ferrill emphasizes, “Canada and the U.S. can definitely work together more efficiently and effectively to share and then come up with some better strategies,” pointing to the need for increased collaboration to strengthen oversight and disrupt these transnational crime networks.

Looking to further understand the threat of transnational organized crime to Canada’s borders?

Check out Inside Policy Talks recent podcasts with Christian Leuprecht, Todd Hataley and Alan Bersin.

To learn more about Dr. Ferrill’s research on TBML, check out her chapter in Dirty Money: Financial Crime in Canada.