The 2026 federal budget must deliver stronger growth and sustainable finances: Drummond

Published by The Hill Times.

The Canadian economy continues to fail to address the challenge of its weak productivity. Now added is the fissure in the once solid Canada-United States trading relationship. These twin challenges interact. Worsened access to the U.S. market limits Canadian firms’ ability to scale up and strengthen productivity, making it more difficult to compete in markets around the world. Population aging and the costs of climate change make this country’s economic future even more perilous. The 2026 federal budget must contain dramatic policy shifts to overcome these challenges, as the C.D. Howe Institute’s upcoming 2026 shadow budget will show.

The government’s 2026 spring economic update (SEU) projected deficits exceeding $50-billion annually through 2030-31, and a net debt-to-GDP ratio remaining over 40 per cent. Thirteen cents of every revenue dollar goes to paying interest on that debt. That borrowing siphons off resources that could be used more productively. The growth in unproductive spending is obvious in an 80 per cent increase in departmental operating costs over the past 10 years, 99,000 more public servants with average compensation of $143,000, and a doubling of spending on contracts, with no commensurate increase in the scope or quality of services provided. Bond yields are rising globally, in good part driven by concerns about high public sector indebtedness. Canada has not been immune, with the yield on 10-year Government of Canada bonds rising 75 basis points over the past six months. Still, Canada’s rate is 100 basis points below that in the U.S., where a slow-burning fiscal crisis is creating mounting anxiety. This country must solidify its finances to contain upward pressure on rates and maintain its borrowing advantage.

Despite the rhetoric about cutting spending, the ratio of program spending to GDP is projected in the SEU to be 15.1 per cent in 2030-31, which, aside from recent years, would be the highest level since 1994-95. Reducing spending to the 2003-04 to 2019-20 average of 13.4 per cent would provide $66.6-billion, easily balancing the budget. A thorough program review focused on value for money should reduce spending by examining not only operating costs, but also transfers to individuals and provinces and territories, and subsidies and tax expenditures. Programs that cannot be redesigned to achieve appropriate outcomes at the lowest cost should be scrapped. Such a review would likely find a clear case for a substantial cut in business subsidies.

One cost of large deficits and a high debt burden is that the tax burden must remain high; the projected ratio of revenues to GDP in the SEU stays well above the average from 2008-09 to 2019-20. Unfortunately, that ratio likely cannot fall until spending is on a more sustainable path. Further, relative to most developed countries, Canada relies more heavily on economically damaging personal and corporate income taxes and less on more neutral consumption taxes. The 2026 budget should raise the GST rate and use the proceeds to lower personal and corporate income taxes while offering incentives for greater business investment. The steep marginal corporate income tax rate faced by businesses trying to scale up and grow must be reformed.

The recent emphasis on growth prospects from the production and overseas transportation of fossil fuels is understandable. But parallel efforts are needed to make this country a global leader in clean growth. Canada also needs a national effort to finally end internal trade barriers and streamline regulatory processes.

The bloated expenditure budgets of recent years are a drag on growth. The weight of debt siphons resources away from more productive uses. The anticipated tax and spending parameters in the 2026 budget dull incentives for growth. All of this can and must change. The budget could then play a key role in revamping Canada’s economy to meet today’s serious challenges. There will undoubtedly be resistance to the bold actions required. But acceptance should come when it is understood that Canada’s current status quo offers no prospect of prosperity.

Don Drummond is a fellow-in-residence with the C.D. Howe Institute as well as a Stauffer-Dunning Fellow and adjunct professor at the School of Policy Studies at Queen’s University.