Canadians who expected a Carney government to be thriftier than its predecessor should brace for disappointment.
Confirmation of this fiscal reality will come with Prime Minister Mark Carney’s first budget on Nov. 4.
Canadians gave Carney a mandate for a continuation of the Trudeau government’s deficit financing when his Liberals won the April 28 election.
Carney’s Liberals campaigned on a pledge to run large deficits for the next four years.
In Carney’s pre-election costing of his agenda in April, a total of $225 billion would be added to the national debt over the next four years.
By comparison, the Trudeau government planned to add $131 billion to the debt in that period, according to its Fall Economic Statement (FES) late last year.
Carney plans to cut tens of billions of dollars from the cost of operating the government. But that won’t be enough to cover the cost of new spending on housing, defence and nation-building projects.
Many current government expenditures are protected from cuts, including transfers to the provinces, pensions, OAS payments, child care, denticare and pharmacare.
That leaves an annual $180 billion to $200 billion in expenditures from which to cut.
Carney hopes to minimize the pain from cuts through attrition rather than the mass layoffs in the Trump administration early this year.
And the prime minister hopes to garner savings from widespread deployment of artificial intelligence (AI) to make delivery of government services more efficient and less costly.
But whatever savings those efforts yield won’t be enough to prevent sizable deficits.
Earlier this month, Carney allowed that his government will run a “substantial” deficit this year, higher than the $61.9 billion forecast in the FES.
“There’s going to be implications for the deficit,” Carney said this month of planned increases in government spending, “but it’ll build a much stronger Canada going forward.”
Carney is counting on the private sector to provide much of the financing for his nation-building projects.
The former central banker has the connections to recruit those investors from among Canada’s large pension funds and offshore sovereign wealth funds.
Private capital should be available for planned revenue-generating infrastructure projects and Carney’s $13-billion program to build affordable housing announced this month.
But it won’t play much of a role in the extra $8.7 billion in defence spending that Carney plans.
That increase will be followed by continued large defence budgets in years to come with Carney’s resolve to meet NATO spending targets.
Carney will be competing for capital in a spendthrift world that has driven itself to historically high debt levels.
The U.S., France and the U.K. are among the most conspicuously overstretched economies in their debt accumulation. Even traditionally frugal Germany is engaged in a spending spree on new infrastructure.
Western governments, Canada included, are under pressure to increase spending on housing, defence and infrastructure. And the Western economies’ aging populations mean higher expenditures on health care and seniors’ and pension benefits.
Last year, governments and corporations worldwide borrowed an unprecedented $25 trillion (U.S.), an increase of $10 trillion (U.S.) from pre-pandemic levels.
Carney’s government will try to raise $612 billion in world debt markets this year, a record amount for Canada.
In a report earlier this year, the Organization for Economic Co-operation and Development (OECD) cautioned on what appears to be a new global debt addiction among advanced and emerging economies alike.
The report acknowledged that additions to debt over the past 15 years or so were understandable as governments tried to soften the blow of the Great Recession and provide income supports during pandemic lockdowns.
But “what is remarkable is that those spikes were not one-off increases,” said Carmine Di Noia, the OECD’s director for financial and enterprise affairs.
“In both cases, rather than returning to previous trends, borrowing levels have remained at new highs,” said Di Noia.
Canada is in a stronger position than most of its G7 peers to take on additional debt in a bid to create a more resilient economy in coping with U.S. tariff damage.
For instance, this year’s deficit is expected to equal about two per cent of Canadian GDP. That’s lower than the three per cent that France is struggling to achieve and U.S. deficits that are running at more than six per cent of GDP.
Much depends on Canada pulling out of its current economic slump to boost government revenues needed to match increased interest payments on the debt.
And that, in turn, requires a resolution of Canada’s trade debacle with the U.S., which has already caused significant Canadian job loss, prompting an increase in government spending on income supports.
Brighter prospects ahead depend on an end to the U.S. trade assault, which has stalled business investment and job creation.
Carney said last week that his economic formula consists of both “austerity and investment.”
The hope is that his that job-creating investments will provide enough economic stimulus to offset painful austerity measures.
