If you're a rookie Finance Minister in the midst of a pandemic, you have to take your little victories where you find them. In her first interview after tabling the 2021 Federal Budget on Monday -- the first such accounting in two years -- Chrystia Freeland was quick to do just that. The budget shows that the fiscal deficit for the 2021/21 fiscal year, which ended at the start of April, was C$ 354 billion. In more normal times that would have been considered a disastrous result for a full decade, but Freeland pointed out to her interviewer that it was well below the C$ 380 billion the Government had projected a few months ago and lower than the forecast of the Parliamentary Budget Office. Her sly sidelong glance at the camera seemed to carry a hint that there might be more such news to come under her stewardship.
The Government is certainly forecasting a sharp decline in deficits in the years to come, although the levels remain eye-wateringly high. For the fiscal year just getting under way, the deficit is expected to fall by more than half to C$ 155 billion, as the economy continues to recover from the worst of the COVID pandemic. Smaller declines in the "out years" are projected to bring the deficit down to C$ 30 billion by fiscal 2025/26. That figure would represent about 1.1 percent of GDP, which is the closest thing to a "fiscal anchor" that can be found in this budget. The debt-to-GDP ratio will briefly move above 50 percent before falling to 49.2 percent at the end of the forecast period.
There has been a small groundswell of opinion among business economists in recent weeks suggesting that, with the economy doing much better than expected in dealing with each subsequent wave of the pandemic, the government should avoid providing new stimulus, so as not to risk causing overheating. Freeland herself has seemed at times to be thinking on similar lines. She famously described the unspent portion of the COVID support payments provided to households as "pre-loaded stimulus", which might be taken to imply that further actual stimulus would not be needed.
So much for that. The Government has clearly calculated that as long as the deficits are projected to shrink, it has plenty of room to slip in a few billion of extra spending here and there in pursuit of its longer-term policy goals. Prime Minister Trudeau has spoken in the past of a "great reset" for the economy as it exits the COVID era, and Freeland has somewhat bizarrely characterized the pandemic as an "opportunity". For better or worse, this budget delivers on that.
In aggregate it's a lot more than a few billion dollars. Over the next three years the new spending announced yesterday amounts to C$ 101 billion. Some of that will pay for the extension of existing COVID support programs for a further few months, but much of it is entirely new. The big-ticket item, one with long-term fiscal implications, is a C$ 30 billion down-payment to set up a national child care program. There's also C$ 18 billion for Indigenous communities and a similar amount for "green" initiatives. There are few revenue-boosting measures, although there will be a small "Netflix tax" and a surtax on purchases of expensive cars and boats.
Trudeau and Freeland would be happy to use this budget as a springboard for an election campaign. They may not get that opportunity as soon as they would like, however: while Conservatives are predictably up in arms over the budget's perceived fiscal irresponsibility, the smaller NDP has indicated that it will not look to bring down the minority government in the midst of the pandemic. Even so, Trudeau is unlikely to wait much beyond Labour Day before finding a way to trigger a poll. Canadians may be relaxed about all that red ink for the moment, but as things start to get back to some kind of normal, Conservative warnings about the perils of debt, however misguided those may be, will start to find an audience again.
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