Stronger fiscal anchors can balance the budget

For years, CPA Canada and I have been advocating for a stronger fiscal anchor than the government’s current long-term reduction of debt-to-GDP ratio. Hoping for an economy that grows faster than our debt is way too simplistic — and frankly lacks any serious commitments.  

Budget 2024 introduced a deficit-to-GDP ceiling of one per cent, but they punted compliance to 2026-2027 and future years. It is an improvement, but it is not strong or binding enough for my liking. Regardless, this had led us to focus on setting a clear timeline for balancing the budget moving forward.  

During the most recent fiscal sustainability report of the Parliamentary Budget Officer (PBO), we learned that the government does not intend to balance the books until 2040. This is very far from ideal and even concerning.  

In the same report, the PBO concluded that federal finances were sustainable in the long run, as are public pension funds with overgrown surpluses making the headlines recently. This, however, ignores provinces and territories that are not fiscally sustainable due to healthcare spending growing faster than their revenues. 

The only option here is to move money around, most likely through healthcare transfers. Inevitably, this will worsen the financial position of the federal government, which highlights the importance of having a strong fiscal anchor at the federal level to begin with.  

We should remain cautious with long-term forecast since any imprecise hypothesis compounds over time — introducing significant uncertainty in the predictions. In this case, labour productivity is assumed to grow slightly slower than the average between 1982 and 2019. But we have yet to see any sustained labour productivity growth since 2019. If that does not change, revenues will underperform.  

Balancing the budget will require downsizing  

I have already mentioned that the federal headcount was getting out of control and most recent numbers still show 3 per cent growth in 2024. This is leading to operating expenses growing by close to 40 per cent or $36 billion since the pandemic. These expenses have outgrown transfer payments by 9 percentage points between 2019 and 2023. The federal government is getting heavier, by all accounts. Interestingly, the pandemic was marked by very low operating costs compared to transfer payments indicating that something can be done on that front.  

Additionally, the growth of the federal government has disconnected from its client’s base. The 43 per cent growth of the personnel since 2015 is almost triple population and workforce growth, and doubles business growth. We only see comparable growth in client base and federal personnel for immigration. It makes one wonder whether we’re experiencing more, or better, public services from this growth in the federal workforce.  

Downsizing seems inevitable — and the simple attrition through retirement proposed in budget 2024 is not going to cut it. We need targeted intervention with departments and agencies clearly tied to outcomes for taxpayers and businesses. This needs to be clearly communicated and publicized to support trust in the government, especially now.  

An independent review also might be in order, since public administration incrementally grows over time. Organizations need to readjust their priorities and structures periodically and governments are no different. A simple example that comes to mind is the doubling of the Public Health Agency of Canada during the pandemic. Is that needed in 2024 especially with provinces having their own agencies? I do believe that careful examination could lead to reduced duplicates on the federal level and savings on operating expenses especially as it relates to managing transfer payments.

Recession leads to deficits, but not the other way around 

I argued extensively for the virtues of fiscal discipline, the pandemic being the clearest argument one could make. An unpredicted black swan event leading to a 50 per cent increase in the federal debt-to-GDP ratio. We might not see an event of similar magnitude, but are almost certainly going to live through more recessions, which are bound to unpredictably impact public finances. 

However, an overperformance of the economy does not lead to surpluses and recently have not even reduced deficits. With the economy managing to surprisingly withstand higher interest rates, the excess revenues were all spent, and deficits remained stable at $40 billion. Prudence is in order.  

There is no shortage of ways to spend money, and it is the government and public administration’s role to set strong budgetary precautions. We are certainly not sending the right signal to the voters and the private sector when balancing the budget is merely an afterthought. We should be anything but careless when it comes to spending our money.