Connect with us

Business

Understanding the Nature of Canada’s Fiscal and Economic Challenges

Published

10 months ago

10 minute read

From the Fraser Institute

By Jake Fuss and Jason Clemens

” between 2016 and 2019 (pre-COVID), growth in per-person GDP (inflation-adjusted) was an anemic 0.9 percent. According to one study, among the last five pre-recession periods in Canadian history, the Trudeau period (again, 2016 to 2019) recorded the weakest economic growth “

The Trudeau government was first elected in 2015 based in part on a new approach to government policy, which promised greater prosperity for Canadians based on short-term deficit spending (totaling $25.1 billion over three years), lower taxes for most Canadians (except higher-income earners), and a more active approach to economic development (LPC, 2015). This new policy direction stood in stark contrast to the consensus of the previous 20 years (Clemens and Palacios, 2017). The result has been a marked deterioration in the country’s finances, economic stagnation, and a collapse in business investment. If Canada is to restore its fiscal and economic health, Ottawa must enact fundamental policy reform.

Government spending, taxes, and debt

The Trudeau government has markedly increased spending to finance both new programs and increases in existing programs. Federal spending (excluding interest costs) increased from $256.3 billion in 2014-15 (the year before the Trudeau government took office) to $448.2 billion in 2022-23 (an increase of 74.9 percent) (Canada, 2023a) and a projected $453.0 billion in 2023-24 (Canada, 2023b). Not surprisingly, COVID-related spending contributed to increases in 2019-20 to 2021-22. But in 2022-23 and thereafter, there is no COVID-related spending.

The federal government has used tax increases and large increases in borrowing to finance these spending increases. In 2016, the federal government increased the top personal income tax rate imposed on entrepreneurs, professionals , and business owners from 29 percent to 33 percent. Consequently, the combined top personal income tax rate (federal and provincial) now exceeds 50 percent in eight provinces (with the remaining provinces only slightly below 50 percent) and in 2022 Canada had the 5th highest tax rate out of 38 OECD countries. This represents a serious competitive challenge for Canada’s ability to attract and retain entrepreneurs, investors, skilled professionals, and businesses.

And while the Trudeau government reduced the middle personal income tax rate, it also eliminated several tax credits. The combination of the two policy changes means that 86 percent of middle-income families now pay higher personal income taxes (Palacios et al., 2022). If the analysis also includes increases to the Canada Pension Plan contribution rate, almost all Canadians now pay higher taxes.

The Trudeau government also borrowed to finance its new spending. Figure 1 contrasts the originally
planned deficits with the actual deficits incurred by the Trudeau government (excluding COVID-related
spending) from 2016-17 to 2022-23. The actual borrowing exceeds the originally planned borrowing
every year (except 2021-22), often by significant margins, due to the government’s inability to control
spending growth.

The string of deficits means federal debt (measured as gross debt) has ballooned to $1.9 trillion
(2022-23) and is projected to reach $2.4 trillion by 2027/28, fueling a dramatic growth in interest costs,
which have grown by 53.2 percent (inflation-adjusted) between 2014/15 and 2023/24 and will reach
a projected $46.5 billion in 2023/24. Interest costs now consume substantial revenue that is then unavailable for government services or tax reduction.

Simply put, Trudeau government policy changes have produced large increases in government spending, taxes, and borrowing. Unfortunately, these policy changes have not resulted in a more robust and vibrant economy.

Weak economic growth and collapsing business investment

The broadest measure of living standards is GDP per person, which calculates the total value of all goods and services produced in the economy in a given year (adjusted by the population). As illustrated in Figure 2, between 2016 and 2019 (pre-COVID), growth in per-person GDP (inflation-adjusted) was an anemic 0.9 percent. According to one study, among the last five pre-recession periods in Canadian history, the Trudeau period (again, 2016 to 2019) recorded the weakest economic growth (Clemens, Palacios, and Veldhuis, 2021). Another study found that Canada’s per-person GDP growth from 2013 to 2022 was the weakest on record since the 1930s (Cross, 2023). And per-person GDP in 2022 (inflation-adjusted) had still not recovered from the pandemic losses and was basically stagnant at 2018 levels (see figure 2).

Prospects for the future, given current policies, are not encouraging. The OECD projects that Canada will record the lowest rate of per-person GDP growth among 32 advanced economies from 2020 to 2030 and from 2030 to 2060(OECD, 2021).Countries such as Estonia, South Korea, and New Zealand are expected to vault past Canada and achieve higher living standards by 2060.

According to a recent analysis, Canada’s economic growth crisis is due in part to the decline in business investment, which is critical to increasing living standards because it equips workers with tools and technologies to produce more higher-quality goods and services. This, in turn, fuels innovation and improved productivity (Cross, 2023). There are obvious explanations for the decline in business investment including regulatory barriers, particularly related to the energy and mining sectors (Globerman and Emes, 2021), and government deficits, which imply tax increases in the future, dampening investment today. Business investment (inflation-adjusted), excluding residential construction, has declined by 1.8 percent annually since 2014.

According to a 2023 study (Hill and Emes, 2023), between 2014 and 2021, business investment per worker (inflation-adjusted, excluding residential construction) decreased by $3,676 (to $14,687) compared to growth of $3,418 (to $26,751) in the United States. Put differently, in 2014, Canadian
businesses invested 79 cents per worker for every dollar invested in the United States. By 2021, that level of investment had declined to just 55 cents per worker.

Moreover, the amount of investment in Canada by foreigners has decreased while the amount of investment by Canadians outside of the country has increased. In 2008, the two levels were roughly comparable—$65.7 billion in foreign direct investment (FDI) in Canada vs. $84.6 billion in investment by Canadians outside of the country. However, a sizeable change began in 2015; by 2022, the amount of FDI ($64.6 billion) was significantly smaller than the amount of investment by Canadians outside the country ($102.3 billion).

Finally, while Canada’s labour market has consistently demonstrated its strength and resilience, the labour market numbers hide some concerning trends. For example, between February 2020 (when the pandemic began) and June 2023, private-sector job creation (net) was fairly weak at 3.3 percent compared to 11.8 percent job growth in the government sector (Eisen, Ryan and Palacios, 2023). In other words, the recovery and growth in the private sector following the pandemic has not been as strong as expected.

Conclusion: The Path Forward

There is reason for optimism, however, since many of Canada’s challenges are of the federal government’s own making. The Chrétien Liberals in the 1990s faced many of the same challenges that we do today (Veldhuis, Clemens, and Palacios, 2011). By shifting the focus to more prudent government spending, balanced budgets, debt reduction, and competitive tax rates, the Chrétien Liberals—followed in large measure by the Harper Tories—paved the way for two decades of prosperity when Canada outperformed other OECD countries on economic growth, job-creation, and business investment.

To help foster greater prosperity for Canadians today, the federal government can learn from the Chrétien Liberals, and the Harper Tories. The rest of this series identifies policy options that can increase living standards for Canadians by repairing federal finances, improving tax competitiveness, and lowering economic barriers. These reforms could help build a more prosperous country through the creation of good jobs which would lead to rising incomes for Canadians.

Authors:

Jake Fuss
Director, Fiscal Studies, Fraser Institute
Jason Clemens
Executive Vice President, Fraser Institute

 

Related Topics:

Todayville is a digital media and technology company. We profile unique stories and events in our community. Register and promote your community event for free.

Follow Author

More from this author
Alberta / 8 mins ago

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

Business / 3 hours ago

Trump’s government efficiency department plans to cut $500 Billion in unauthorized expenditures, including funding for Planned Parenthood

Alberta / 6 hours ago

Alberta government announces review of Trudeau’s euthanasia regime

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
Continue Reading

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.

Related information

Continue Reading

Trending

X