Ottawa’s summer spending flurry offset by stronger GDP, oil revenues

The Liberals also have outlined $60 billion in existing government spending they plan to trim over five years, in part by downsizing the federal public service.

Carney promised that the government would balance operating spending in three years’ time to allow it to borrow only for things that lead to capital formation, like infrastructure and other major projects.

The prime minister said earlier this week the government will now hit that milestone next year, instead of by fiscal 2028 as first promised.

“A persisting commitment to fiscal prudence, discipline and spending efficiency … has moved up balancing the operating budget agenda by a whole year,” said John Fragos, spokesperson for Finance Minister François-Philippe Champagne, in a statement to The Canadian Press.

Some experts argue that the improvements to Ottawa’s bottom line have more to do with the economy than with fiscal prudence.

The first quarter of the federal fiscal year was much stronger than most economic forecasters predicted back when the Liberals tabled the spring economic update in April.

Randall Bartlett, deputy chief economist at Desjardins, said federal revenues are up 10 per cent year-over-year for the April to June period. The government’s spring update called for a revenue increase of roughly 3.5 per cent for the whole year.

Solid consumer spending and robust corporate profits were among the factors giving federal revenues a boost in the spring, Bartlett said.

Another major factor has been global oil prices, which have been holding higher and for longer than many anticipated.

The federal government has turned some of its windfall from higher oil revenues into a break for motorists at the gas pumps through a pause on the federal fuel excise tax in the spring. Earlier this month, Champagne announced that measure would be extended into 2027.

Those extra revenues have helped offset a raft of federal spending announcements over the spring and summer.

Bartlett estimates Ottawa has announced more than $100 billion in spending over the next 10 years since the spring update. His figures include an estimate of public money needed to finance a proposed oil pipeline from Alberta to the B.C. coast.

Bartlett said those two countervailing forces on Ottawa’s bottom line should leave the overall deficit trajectory fairly stable compared to the spring economic update, and could suppress the debt-to-GDP ratio when Ottawa publishes its fall budget.

Also adding to the Liberals’ deficit is the “productivity mega-deduction,” a new tax measure announced at this past week’s investment summit that is meant to stimulate business capital spending. The deduction is expected to cost $36 billion over five years.

But Bartlett said that while this new tax expenditure is aimed at capital formation, it should be classified as program spending and sorted into the federal government’s operating budget.

He and other fiscal hawks, including the parliamentary budget officer, have criticized Ottawa’s loose definitions for capital and operating spending.

“A capital investment, as it’s accounted for in public accounts, is an asset which then goes on the federal balance sheet. This does not,” Bartlett said.

“The definition that’s used for operating expenses by the federal government in its budgeting process is not taken seriously by anyone outside of Ottawa.”

Fragos said in his statement that the federal government is being stringent with the public purse. Tracking operating expenses is a better guardrail than other traditional anchors like debt-to-GDP because it relies on absolute levels rather than a ratio, he argued.

He also pointed out that debt-to-GDP is stable over the long-term in Ottawa’s outlook, which “provides an additional guardrail” for federal finances.

Sahir Khan, executive vice-president at the University of Ottawa’s Institute for Fiscal Studies and Democracy, said the government’s definitions for capital and operating expenses aren’t inherently bad, though they might be “a bit broader” than they are in other jurisdictions.

Khan also attributes much of the improvement in Ottawa’s fiscal position to stronger tax revenues. He said the government’s new retaliatory duties on U.S. goods are mostly a wash fiscally because that revenue is largely repurposed into supports for tariff-stricken sectors.

Khan said the Carney government’s bias toward capital spending is a departure from former prime minister Justin Trudeau, whose government tended to focus on program spending and transfers to achieve policy objectives.

Khan said while the government still needs to keep a close eye on its deficit and debt costs, borrowing to finance a capital-focused agenda can pay dividends by eventually generating returns if those investments bear fruit.

“We want to see returns to the economy and eventually to the federal government in terms of additional tax revenue, which … is going to take time,” he said.

Bartlett said Ottawa’s efforts to kick-start Canada’s economy will be hamstrung until there’s clarity on the U.S. trade front.

“Is it going to have a positive impact on business investment and ultimately economic growth and productivity? Probably. How much of an impact is it going have? We don’t know,” Bartlett said.

The government’s new tax incentive might help inject some life into Canada’s stagnant business investment landscape, he said, but its overall impact might be limited by drags on growth caused by tariffs and trade uncertainty.

“There are a lot of other headwinds facing the Canadian economy.”

by The Canadian Press

Ottawa’s summer spending flurry offset by stronger GDP, oil revenues

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