No end in sight for government spending spree across Canada

This budget season, most Canadian governments preached the importance of fiscal responsibility while failing to introduce an effective plan to achieve their own objectives. Many provinces and the federal government continued to borrow and increase spending without reasonably working towards a balanced budget, despite every jurisdiction experiencing an unexpected influx of revenue.

Projections for government revenues increased significantly across the country due to unexpectedly high commodity prices and a faster-than-anticipated economic rebound from COVID. The boost in revenue would normally be welcome news since governments could use the additional money to reduce their deficits or balance their budget entirely.

For example, 2022 revenues are $30.5 billion higher than the Trudeau government projected in last year’s budget. The federal government did not reduce its deficit by much for 2022 and introduced an additional $22.4 billion in program spending relative to the previous budget.

Eight provinces chose not to balance their budgets in 2022. Of that group, only five provided an estimated date when they would return to budget balance—the earliest timeline was four years in both Saskatchewan and Newfoundland & Labrador. Moreover, while the two most populous provinces (Ontario and Quebec) are not on track to balance their budget before 2027/28. Three provinces and the federal government failed to provide any date at all.

The lone bright spots this year were New Brunswick and Alberta who both project relatively small surpluses. New Brunswick is the only province to balance its budget throughout the entire pandemic. Spending restraint has been crucial to this success and the province plans to continue keeping spending roughly in line with government revenues for the foreseeable future.

While Alberta has made some progress in demonstrating spending restraint, its surplus and improved fiscal position are almost entirely due to higher resource revenue fuelled by a rebound in commodity prices, which means the province risks returning to deficits in the future when resource revenues inevitably decline.

So, why should you care about government spending and deficits?

The failure to restrain government spending in most regions means that Canadian governments will add debt that would not otherwise exist, making it even more difficult to improve financial sustainability. Canadians today and in the future will pay for this debt through higher government debt interest payments.

While interest rates were near historic lows recently, that trend appears to be a thing of the past. In April, the Bank of Canada doubled its policy interest rate to 1.0 per cent and many analysts expect future rate hikes as inflation continues to run rampant in the economy and hit the pocketbooks of Canadian families.

Residents in all provinces already pay more than $550 per person annually on government debt interest. As interest rates rise, government debt interest payments will consume more revenue and leave less money for priorities such as health care and education.

High spending and more borrowing were common themes for most Canadian governments this year. Reversing this trend will be critical moving forward. Otherwise, Canadians will pay the price.