The federal government unveiled its long-awaited fall economic statement today – putting to rest weeks of speculation about larger-than-estimated deficits and the potential failure of other fiscal “anchors” Ottawa claims will keep its budget on track.
As recently as last spring, in her Budget 2024 speech, Finance Minister and Deputy Prime Minister Chrystia Freeland set out three “fiscal guidelines” that would demonstrate the government's continued commitment to fiscal responsibility. The first was a pledge to keep the 2023-24 deficit at or below $40.1 billion.
Last week, Freeland would no longer commit to that goal.
“I chose my words carefully, because it's important to be clear with Canadians. It's important to be clear with the capital markets,” she said at the time.
The Globe and Mail recently reported that the government has sold its remaining Air Canada shares and that the profits could help keep losses under control. Still, most experts seem to believe the federal government will miss its deficit target.
The Deputy Prime Minister and Minister of Finance on Tuesday said that the financial anchor of the federal government is the falling debt-GDP ratio, without giving much data on whether the deficit will remain at or below 40.1 billion dollars.
Jock Finlayson, a senior fellow at the Fraser Institute and chief economist at the Independent Contractors and Trade Association, said he expected the revised deficit to be $10 to $15 billion higher than last spring's estimates.
“We have seen gradual slippage in meeting budget targets since the worst of the Covid crisis has passed,” he said.
Another government promise – to keep the deficit below one percent of GDP in 2026-27 and in future years – is also up in the air due to recent large-scale federal spending commitments on child care, dental care and pharma care.
But a senior government official insists the only fiscal railing that really matters is the falling debt-to-GDP ratio, which Freeland promised to maintain last spring. A declining ratio means that the federal debt as a fraction of the size of the economy continues to decline.
“Other railings are important, but that's one,” said the official, who spoke on condition of anonymity because he was not authorized to speak publicly about the update.
Last week, the finance minister said she still expects to meet the projected 42.1 percent debt-to-GDP ratio for the 2023-24 fiscal year.
“You can't pick and choose financial anchors as you go, and abandon a commitment you made only a year ago,” said Robert Asselin, senior vice-president of the Business Council of Canada.
“The fact of the matter is that this government is losing control of public finances and Canadians are taking notice.”
Today's fiscal update comes as a blow to Canada's most important trade relationship. US President-elect Donald Trump has threatened to impose 25 percent tariffs on imports from Canada and Mexico, which could weaken the economy.
That threat has Canada and provinces and territories scrambling to implement — potentially costly — measures to address Trump's perceived concerns about border security, immigration and illegal drugs.
A senior government official warned that the fiscal update would not be a direct response to Trump's threats.
“To focus on tariffs is to focus too narrowly,” the source said, adding that the administration believes Trump's ultimate goal is to get companies to move to the U.S. or at least move their investments there.
“He wants capital to go to the U.S. We have to get our ducks in a row, get ready to fight hard to get capital out of the U.S. … to promote economic growth and keep capital here.”
Finlayson said he wishes the federal government was more concerned with “the complete stagnation of Canadian productivity” and less concerned with surface-level measures like what he called a “gimmick” GST holiday.
“We're painting the garden and planting flowers in the front garden of the nice little house, while its foundation is being chewed away by termites,” he said.
Canada's Productivity Problem
Finlayson said there are two ways to grow the economy in the long run. One is to increase the number of people in the labor force – something Canada relies heavily on immigration to achieve. Another way is to increase the value of what is being made by increasing productivity – an area where Finlayson argues that Canada has failed.
“Tackling these big challenges is not easy politically because there are no quick wins. Standing up and talking about productivity is a good way to clear people's room,” he said.
While the government may say this year's fiscal update is not a response to Trump's threats, it may include measures to do exactly that.
While the full details of Ottawa's promised plan to strengthen border security — which could include new legislation and up to $1 billion in new spending — aren't expected to be outlined in the fiscal update, it could provide some clues on the strategy. It could also include language indicating the government's openness to increasing military spending to two percent of GDP and accelerating its timeline for meeting NATO goals.
Overall, Canadians shouldn't expect a major U-turn, a senior government source said.
“We have one focus – housing, affordability and economic growth,” the source said.
Last week, Freeland announced two measures to include in the update — one to make it easier for homeowners to add secondary suites to their homes, and another to enhance an existing scientific research tax incentive program.
Those hoping 2023 would include promised $250 rebate checks for working Canadians earning less than $150,000 will probably be disappointed. None of the opposition parties indicated support for the measure as originally proposed, and the minority Liberal government cannot pass the measure without the support of at least one other party.
“We need a dance partner and no one wants to work with us on a check,” said a government official.
The Fall Financial Update is coming late this year – five days before the end of the fall. The government blames the delayed release on the Conservatives' ongoing filibuster in the House of Commons over a question of privilege – but critics have accused Freeland of wanting to delay the release of bad economic numbers. Others have suggested that Trump's election threw the Treasury Department off-track.
“Did we win again because of the Canada-U.S. situation? Yes,” the government official said. “But the delay was mostly about where and how we could present the financial statement, given the state of things in the House of Commons at the moment.”
That impasse in parliament casts doubt on the government's ability to actually follow through on the plans outlined in today's fiscal update.
