Opinion is divided on whether the federal government has fiscal room to play with in next week’s budget. Jason Jacques, interim Parliamentary Budget Officer, describes Ottawa’s fiscal prospects as “alarming,” stupefying” and “unsustainable.” Kevin Page, who was the first such officer, says the government’s finances are sustainable but significant new revenues will be needed to generate confidence and overcome Canada’s economic challenges. The head of the International Monetary Fund believes we do have fiscal room but only for productivity-boosting investments. The C.D. Howe Institute wants Ottawa to get its net debt/GDP more firmly on a downward track.
Different economic and fiscal projections are not the main reason for these sharply differing estimates of fiscal room. Given the Trump tariffs, nobody is expecting the strong economic growth that could bring deficit and debt burdens down sharply. The PBO’s latest fiscal outlook showed a deficit of $68.5 billion this fiscal year, followed by modest declines, though net debt/GDP ratio rises, costing 13.3 cents of every revenue dollar in public debt charges. That doesn’t include 100-odd election promises totalling more than $20 billion a year or the big new commitment to NATO. Taking those pressures into account, in July the C.D. Howe Institute projected a deficit of $92.2 billion this year, an average of $83.5 billion over the next three, and the debt ratio rising to 46 per cent by 2028-29 — another 2.3 percentage points higher than the PBO estimate.
The contrast in opinions is rooted more in disagreement about the numbers’ implications. Even those who see room for taking on more debt don’t favour broad new spending or tax cuts. Kevin Page says the resources should aim squarely at our economic challenges. The IMF wants support only for productivity-boosting investment. Neither would likely support implementing the remaining Liberal election promises, most of which have little to do with raising productivity or growth or mitigating the effects of U.S. tariffs.
The case for fiscal room rests largely on Canada’s being in better fiscal shape than most other developed countries. But better is relative. The Economist magazine predicts wealthy countries’ high debt will lead to higher inflation and tax increases. Britain and France are already facing tremendous pressure to raise taxes to lower their deficits and their fiscal woes are spilling over into political instability. Historically, long-term interest rates in the U.S. have been lower than in Canada. Yet the U.S. 10-year treasury rate is now almost one percentage point above ours, reflecting greater U.S. indebtedness and a government making the situation worse. According to the Congressional Budget Office, the One Big Beautiful Bill adds another $3.4 trillion of debt over the next decade.
Kevin Page argues Canada’s current fiscal situation is much better than during the Mulroney and Chrétien eras. But the runaway deficits and high debt burden of that era eventually required severe and painful fiscal austerity. Should we take the risk and raise our debt to the same elevated levels as many of our peers have reached? Or should we recall the lessons of our own fiscal past and step back from the dangerous position we got into three decades ago?
Piling on more debt is fraught with risk. Past episodes of high deficits and debt have typically ended badly — both in Canada and elsewhere. Ottawa should heed the lessons of our own history and bring down the debt burden. Postponing fiscal redress only makes it harder to achieve later: even if we survive the current tariff crisis, we will still face heavy fiscal pressure from population aging, climate change and our weak productivity growth.
Putting a lid firmly on the national debt does not mean the budget cannot bolster productivity and growth. Everyone agrees we need to be more productive and innovative, even more so if we lose relatively free access to the U.S. market. Much in the existing structure of spending and taxes stands in the way of promoting growth. The number of federal civil servants grew more than a third from 2015 to 2023. Compared with most of our peers, we rely much more heavily on economically costly personal and corporate income taxes and less on broad-based, lower-cost consumption taxes. The C.D. Howe Institute recommends spending increases and tax cuts to enhance innovation, productivity and growth, partly funded by cuts to existing spending and a hike in the GST rate.
The best outcome Nov. 4 would be a budget that tilts spending and taxes toward supporting productivity, competitiveness and growth while bolstering Canada’s fiscal advantage over other countries by reducing our dependence on debt financing.
Don Drummond, fellow-in-residence at the C.D. Howe Institute, is a Stauffer-Dunning fellow at Queen’s University.