Last week's federal fiscal update missed the mark in five key ways, according to Kevin Lynch, a former deputy minister of finance. The spring economic statement, presented by Minister of Finance Francois-Philippe Champagne and Prime Minister Mark Carney, was criticized for lacking the urgency needed in a time of global rupture.
Detached from Context
First, the update seemed strangely detached from the current policy context. It lacked the forceful narrative of global rupture, fracturing trade and security alliances, and the consequent need for bold changes that were hallmarks of Prime Minister Carney's mandate letter, his pre-budget comments, and his Davos speech. There was little updating on progress regarding productivity improvement, internal trade barrier elimination, trade market diversification, and new major projects. Despite announcing an international investment summit in September, there was no update on tackling the regulatory 'stealth tax' on investment and growth highlighted in Bill C-5.
Spending Promise Unfulfilled
Second, the promise to 'spend less to invest more' was not fulfilled. Revenues increased, mainly due to higher GDP inflation, but these new revenues were poured back into spending and tax relief. Program spending increased in every year of the fiscal framework, rising 4.5 percent this year alone.
Sovereign Wealth Fund Concerns
Third, the new 'sovereign wealth fund' is essentially a sovereign debt fund. Borrow-to-invest is already practiced by several federal agencies, including the Canadian Infrastructure Bank, the Business Development Bank, and the Export Development Corporation. It is unclear what the new fund will do differently or how duplication will be prevented in the crowded field of federal financing entities.
Fiscal Anchors Missing
Fourth, the government takes too much solace from Canada's relatively low net debt-to-GDP ratio. The statement missed an opportunity to re-establish credible fiscal anchors. Committing to a declining debt-to-GDP ratio and substantial deficit reductions over the four-year framework would restore budgeting rigour and provide markets with convincing forward guidance. Building a contingency reserve and not spending every dollar of new revenue would further enhance credibility. The government needs to worry about total government debt, as gross debt is now 110 percent of GDP, higher than in Germany, the U.K., and many smaller EU countries. This year's federal deficit of $65.3 billion involves gross debt issuance of $133 billion, with hedge funds becoming major purchasers, potentially adding instability to bond markets.
Lack of Focus and Urgency
Fifth, the statement lacks focus and urgency given the times. It offers a laundry list of new initiatives, many small but spread across policy areas, using up all fiscal room created by higher revenue. Despite being in a crisis described as a global rupture since World War II, the update includes measures for protecting whales, raising sport support, and repairing small craft harbours, rather than focusing singularly on declared priorities like productivity growth, trade diversion, lowering internal trade barriers, renegotiating CUSMA, and rebuilding the military.
The Carney government's diagnosis of geopolitical and economic pressures has garnered support, but rapid and effective implementation is key. This will require more focus and tougher, bolder choices than evident in the spring economic statement.
