Prime Minister Justin Trudeau is set to deliver a budget that will funnel revenue windfalls from soaring oil prices toward costly new programs, passing up another chance to shore up Canada’s finances following record pandemic era spending.

Trudeau’s finance chief, Chrystia Freeland, is expected to use her second budget to roll out more than $100 billion (US$80 billion) in new spending promises, despite the government having run record deficits to blunt the impact of the COVID-19 pandemic. The fiscal trajectory, however, may be little changed given federal coffers are awash in new revenue from inflation and high commodity prices.

The plan, due Thursday around 4 p.m. in Ottawa, is set to continue the tradition of Trudeau’s fiscal policy since taking power in 2015: a preference for new spending over returning the budget to balance, while trying to keep deficits low enough to reassure Canadians and investors he remains fiscally prudent.

“It’s a bit of a balancing act,” said Elliot Hughes, a former adviser to Freeland’s predecessor who is now a consultant with Ottawa-based Summa Strategies.

He said the governing Liberals will be “making commitments and developing policies and spending money in areas they feel will help boost the economy,” while acknowledging “a desire from many corners of the economy in Canada to have the government demonstrate fiscal restraint.”

The case for deficit financing, however, is getting more difficult with inflation at a three-decade high and the economy running up against capacity, prompting calls from business groups for the government to curtail ambitions and focus more on growth initiatives. Spending as a share of output was already poised to settle at the highest levels since the early 1990s, even before any new measures.

It's a bit of a balancing act

Elliot Hughes

“I don’t know if it’s going to hit all the boxes that corporate Canada is looking to have checked off,” Hughes said.

When Freeland presented a budget update in December, the government was on track to post a US$144.5-billion deficit in the fiscal year that ended March 31. That gap was set to gradually decline to US$13.1-billion in 2026-27.

Since then, multiple events have transpired that will result in both more revenue and higher spending.

Inflation is generating major revenue windfalls, fuelled in part by spiking energy prices due to Russia’s invasion of Ukraine. But that war has in turn put pressure on Trudeau’s government to increase Canada’s defence spending.

Last month, the Liberals signed a deal with the left-leaning New Democratic Party to ensure they can govern until 2025 in exchange for strengthening the social safety net, particularly around introducing publicly-funded programs for prescription drug and dental coverage.

Government sources have told Bloomberg News the budget will include significant measures on housing affordability.

The Liberal platform in last year’s election promised a suite of measures that included funding for affordable housing, more supports for first-time buyers, and taxes to dissuade house-flipping and foreign-buyer speculation. The biggest ticket item is a US$4-billion accelerator fund that will give incentives to cities that create more supply.

Freeland will also ban most foreigners from buying homes for two years to cool the nation’s housing market, a source told Bloomberg. Yet the government plans other measures that could potentially boost demand, ostensibly to help new homebuyers. That will include moving ahead with a pledge to allow younger Canadians to put aside money for future down payments in a tax-exempt vehicle.

There will be new funding for the environment. Last week, the government released its roadmap for meeting its 2030 emissions-reduction targets. It promised an additional US$9.1 billion in spending on measures from electric-car charging infrastructure to retrofitting buildings.

One expensive item that will win support from business and industry is an expected tax credit for installing carbon capture systems. The technology is crucial for the government to meet its climate goals, but it could cost tens of billions of dollars in public funding over the next decade.

Defence spending

All signs point to an increase in defence spending too. But sources have said it won’t be a dramatic boost — particularly given that Canada has already budgeted for a large spike in military spending over the next few years to procure new fighter jets, ships and other equipment. Freeland is seen increasing defence spending by $8 billion, according to a government source, with an emphasis on modernizing the North American Aerospace Defense Command.

A joint Canada-U.S. statement last August indicated this could include upgrading the command-and-control systems and installing next-generation, over-the-horizon radar.

There will also be new funding for buying weapons for Ukraine, though overall defence expenditures will continue to fall well short of NATO’s target for spending to reach 2 per cent of output.

New taxes will provide a buffer. The Liberals are expected to introduce a surtax on profits by big banks and insurance companies that is projected to raise about $11 billion over five years. Officials have also argued that new programs, such as affordable child care, will boost economic growth.

But the bulk of the windfall revenue gains stem from higher inflation.

Government income could surpass projections by more than $20 billion over the next two years, a windfall large enough to have allowed the government to balance the budget by 2025. However, Trudeau’s government is likely to book a more conservative amount given extreme levels of uncertainty and volatility as a result of war in Europe.

Bloomberg.com