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Fiscal Policy in Transition: Budget Challenges, Opportunities and Risks

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Summary of Webinar:

University of Calgary economics professor Trevor Tombe discussed federal and provincial budget challenges, risks and opportunities for 2024.

During the last few years, Canada saw the fastest acceleration in inflation since the early 1980s, due to a series of global factors (energy and food shocks and supply chain problems in 2021-2022), rising Canadian shelter costs and expansive fiscal and monetary policies during the pandemic. Since mid-2023, government revenue growth is decelerating with a major economic downshift, while expenditures are on the rise due to inflation, new programs, and significantly higher debt costs. Tombe warned against relying solely on interest rate adjustments for inflation control, urging a greater focus on fiscal discipline as well.

Whether stemming from Consumer Price Index (CPI) increases or the tightening of monetary policy, the Canadian government is grappling with a higher deficit than initially anticipated. The risks include adverse impacts on living standards, real wages and incomes. Canada’s economy continues to lag behind the U.S. in productivity growth and living standards, and has not yet returned to its pre-COVID growth trajectory.

Taking a long-term perspective, the sizable and rising population of individuals who are aged 65 and above carries significant implications for economic growth and budget pressures, particularly as these individuals retire from the workforce. Tombe explored the potential trajectory of federal and provincial budgets in 2024 and beyond, and urged Ottawa to reconsider policy choices that contribute to prolonged budget deficits, such as lowering the OAS eligibility age to 65, increasing OAS amounts for individuals over 75 and introducing targeted Guaranteed Income Supplement (GIS) exemptions. Such changes will lead to an extra $13 billion in government spending by 2028.

One key risk faced by the federal government is a lack of commitment to future expenditure constraints as Canada’s spending has consistently been well in excess of budget forecasts. Tombe advocated a shift to multi-year plans with stricter adherence to planned spending growth. Although he pointed out that Canada’s federal debt-to-GDP ratio is much lower than in the U.S., Tombe also said that continually increasing the ratio over time is not sustainable.

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Speaker:

Trevor Tombe
Professor and Graduate Program Director, Department of Economics, and Research Fellow, School of Public Policy, University of Calgary