Federal Budget Update Needs to Show Path to Balance: Economics Think Tank

As the Liberal government prepares to table its first spring economic update, the C.D. Howe Institute is calling for a clear path back to balanced budgets.

The upcoming April 27 update on the state of the economy and public finances should contain a “realistic assessment of economic and fiscal conditions” as well as targets to restrain spending and tax reforms that encourage consumption and investment, the public policy think tank said in its latest report.

“These measures will likely face political resistance, but without bold action, we risk the prosperity and productivity of our nation for future generations,” said the institute’s Alexandre Laurin, one of the authors of the April 23 report.

Slowing population growth, weak productivity, and an ageing population will reduce revenues and increase spending demands, the report says. This will increase the debt burden for Canadians, particularly younger ones.

Six out of Canada’s 10 provinces have recently tabled budgets showing larger-than-planned deficits and increasing debt levels. Nova Scotia, New Brunswick, British Columbia, Alberta, and Prince Edward Island, which had small deficits or even surpluses in 2020, all project higher deficits.

With the federal deficit also expanding, the report warned that the combined net debt of the federal and provincial governments will reach 82 percent of GDP by 2028. The last federal budget showed a $78.3 billion deficit and offered no plans to balance the budget.

The report said that “fiscal excess has already undermined economic growth and living standards,” and unless further action is taken to reduce the burden of public debt, the savings and investment of Canadians will continue to be undermined.

The report called for the SEU to commit to lower spending in non-priority areas, where it has “ballooned over the past decade.” The document should also outline a clear track toward a balanced budget over four years, and include “credible measures” to achieve it.

The report said Ottawa should establish spending restraint targets based on the levels of the mid-to-late 2010s, before “spending growth exploded.” The report said spending reviews should be more ambitious than those announced in the last budget, which targeted $13 billion in savings annually by 2028.

The government should also prepare major tax reforms to encourage investment, C.D. Howe Institute recently said in a paper. It called for lower corporate income tax and a deferral of taxation until profits are distributed.

Prime Minister Mark Carney was asked on April 23 about the prospect of Ottawa further cutting the corporate tax rate. He said Canada already has the lowest marginal effective tax rate on investment in the G7, at a rate of 13 percent compared to over 17 percent in the United States.

A recent report by the public policy think tank MEI warned that due to increasing elderly benefits, transfers to provinces, and military spending, Canada’s budget deficit could rise to $117 billion by 2035.