The federal government is unlikely to meet its proposed financial goals and reduce the deficit as planned, according to a recent report from one of the country’s largest business groups.
Finance Minister Chrystia Freeland attempted to show that the Trudeau government values fiscal restraint by making a number of monetary objectives during the government’s last financial update in November. These promises included a goal of keeping deficits below 1% of GDP as of the 2026-27 fiscal year.
The new proposed fiscal targets were seen as “helpful” to monetary policy, according to Bank of Canada governor Tiff Macklem, however, some economists doubt the Liberal government’s credibility.
Previously, the Liberal government has had a bad reputation for its disregard of fiscal matters, with Prime Minister Justin Trudeau once sarcastically asking reporters to forgive him for not thinking about monetary policy.
That reputation has led some economists to doubt whether or not these latest promises will amount to anything.
“To meet their proposed deficit target they’ll either need much stronger-than-expected economic growth or they have to make substantial program cuts ahead of an election,” Business Council of Canada senior vice president of policy, Robert Asselin, told the Financial Post.
He was also a former adviser to former finance minister Bill Morneau. The Council published an analysis report, co-authored by Asselin, regarding the new fiscal targets this week.
According to Asselin’s analysis, the federal deficits averaged 1.4% of Canada’s total output between 2017 and 2022, when adjusted for the economic impact of the Covid-19 lockdowns.
Only twice has Canada ever managed to keep its budget shortfall below 1% of its GDP since the Second World War.
The government’s expenditures have remained above 17% since 1945 and this year federal spending accounts for 17.3% of Canada’s GDP.
Asselin noted in the report that previous projections have been “extremely unreliable” over the five-year forecast.
However, with a 2025 election looming and pressure mounting for the Trudeau government to uphold its fiscal promises.
Federal spending became linked to labour market conditions during the pandemic under Freeland as a guardrail measure, but it was done away with as the economy reopened in 2022, notes the report.
Despite Freeland’s claims that fiscal policy decisions would be informed by a medium-term goal of reducing the debt-to-GDP ratio in 2022, it continued to rise last year.
“At some point people aren’t going to believe you and they’ll say your fiscal anchors aren’t credible,” said Asselin. “When you miss three targets in five years, at what point do markets say, this government isn’t doing what it said it would do?”
