Op-ed: International edge no excuse for budgetary complacency

Market View

Economics and Strategy

April 16, 2024 - (Vol. VIII, No. 25)

Op-ed: International edge no excuse for budgetary complacency

By Warren Lovely

In a few hours from now, Canada's Deputy Prime Minister and Finance Minister Freeland will stand in the House of Commons to (finally) unveil the 2024 federal budget. Many of the budget's key measures are already known, as the minority Liberals-languishing in the polls- flipped the traditional budgetary script. Rather than the customary approach of presenting the budget in March, this vital fiscal blueprint was pushed back, buying time for the Prime Minister and Company to pre-announce a raft of fiscal goodies/measures. It appears as a deliberate attempt to wrestle back some control of the political narrative. Pollsters (and ultimately voters) will tell us how successful this budget release strategy is. But we digress…

Notwithstanding its delayed nature, the budget will most certainly devote a section to Canada's apparent fiscal advantage. On this front, it's common practice to cite the nation's general government net debt edge vs. G7 peers. Conveniently, in the immediate lead-up to the federal budget, the IMF offered us a fresh international comparison. As the IMF's just-releasedWorld Economic Outlookmakes clear, Canada does indeed possess a relative fiscal edge vs. many advanced peers. That takes the form of a relatively stronger structural budget balance, more modest borrowing and perhaps most striking of all, a considerably lower net debt burden.

But let's make a couple things clear. Canada's fiscal edge is nothing new; it pre-dates this federal government. In a sense, the Liberals inherited a vastly superior budgetary position. Given the earlier sacrifices involved in securing fiscal sustainability, current and future federal governments should be duty-bound to ensure such an edge is not squandered.

True, a federal shortfall in the neighbourhood of 1½% of GDP may not look egregious. Simply look south of the border if you really want to see a more dangerous fiscal track. But this federal government has clearly been less focused on debt containment, failing to balance the books even as the economy earlier attained full employment.

As things stand, favourable international comparisons may be providing a bit of smoke screen to mask genuinely debatable policy

Chart 1: A relatively better balance in Canada now…

General government net lending/(borrowing) & structural balance: 2024
0
-1									-0.8	-0.9
-2	-1.1
-1.5
-3											-2.9
-4
-5			-4.6	-4.6	-4.9							-4.3	-4.8
-6			-5.5							-5.3
-7	%						-6.5	-6.5							-6.6	-6.7
-8
CAN	DEU	GBR	ITA	FRA	G7	JPN	USA	CAN	DEU	GBR	FRA	ITA	G7	JPN	USA

Net lending/(borrowing) vs. GDP

Structural bal. vs. potential GDP

Source: NBF, IMF (WEO Apr-24)

choices. We're talking about the need for marginal spending/investment to accommodate what has been genuinely disruptive immigration policy. One could reasonably argue that the feds invited in too many people, too fast… certainly more than the housing stock could reasonably absorb, to say nothing of related strains on local/regional government infrastructure. These pressures will take time to fully normalize.

Meanwhile, having inflated the size of government and placed federal spending on a structurally higher plane, new revenue appears to be needed. We await final details in the budget, but it seems the approach favoured in Ottawa is to tax the wealthy and those sectors earning 'excess' profits. For a country already inflicted with capital flight and saddled with a large and growing productivity gap vs. key competitors, it's not clear than an enlarged tax burden will bolster the nation's long-term standard of living.

Finally, a word on that uber-impressive general government net debt edge vs. the G7. If you're familiar with Canada's fiscal history, you may know that an important part of that net debt edge owes to much earlier reforms of the nation's social security system. Those reforms, enacted in the 1990s, placed the CPP/QPP on an actuarially sound footing, with both plans continuing to accumulate a growing pool of financial assets. Make no mistake, this is a clear strategic advantage for Canada. But exclude those assets-which no government really has access to-and Canada's general government debt edge isn't nearly as impressive… not that you're likely to hear such an admission from any federal cabinet minister.

So let's keep the fiscal bragging to a minimum shall we. Seemingly favourable international comparisons should be no excuse for budgetary complacency. Really, it might have been better to have focused on an efficient model of government, one that avoids adding to a lingering inflation threat and one that puts off potentially distortionary taxes that risk discouraging needed investment. The ship may have sailed on Budget 2024 but there's always next year right?

Chart 2: … and into the future

General government net lending/(borrowing), incl. latest IMF outlook
4	% of GDP
2
0
-2
-4
-6
-8
-10		CAN
-12
	USA
-14
	G7
-16
2002	2004	2006	2008	2010	2012	2014	2016	2018	2020	2022	2024	2026	2028

Source: NBF, IMF (WEO Apr-24)

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Chart 3: Thanks in part to CPP/QPP, net debt edge is big…

General government debt burden: 2024
275
	% of GDP					255
250
225					Gross debt
200
				Net debt
175
150						127	123		139
125						112
	105	104
100
75			64				129	158
50						95	98	103
	13	93
25		46
0
	CAN	DEU GBR	G7	USA	FRA	ITA	JPN

Source: NBF, IMF (WEO Apr-24)

Chart 4: … and only expected to grow vs. advanced peers

General government net debt burden, incl. latest IMF outlook
120	% of GDP			CAN
100					USA
80					G7
60
40
20				Net debt for
			USA, G7
				from 2001
0
1980	1984	1988	1992	1996	2000	2004	2008	2012	2016	2020	2024	2028

Source: NBF, IMF (WEO Apr-24)

Chart 5: Complete ranking of general government net debt burdens across advanced world (with Canada looking good)

General government net debt burden: 2024 [IMF data available for 33 advanced nations]

175	% of GDP	158

150																																129
125																															103
100																										91	92	93	93	98
																								83
75																					52	53	57	66
																	46	47	49	49
50													34	35	37	39
								26	29	30	33
						16	21	23
25			8	11	13
	1
0
-25	-3
NOR: -103
-50
		EST		CAN		TWN	NZL		AUS	CZE	LTU	IRL	LVA			DEU		MLT		SVN	SVK	AUT	ISR	Adv	PRT	ESP		BEL	USA	FRA		JPN
NOR	LUX	DNK	SWE	CHE	KOR	FIN	NLD	HRV	ISL	GBR	ITA

Source: NBF, IMF (WEO Apr-24) | Note on shading: CAN shown in red, other G7 nations shown in blue; advanced economy is weighted average

Chart 6: … and the corresponding tally of gross debt burdens (where Canada's edge is far less striking)

General government gross debt burden: 2024 [IMF data available for 41 advanced nations]
275	% of GDP																															255
250
225
200
175																																	139	159 162
150																																111 112 123
125																															95 104 105 105 106
100																														80
																								67	68	69	71	75
75																					59	59	60	64
																	50	54	57
								36	36	37	38	41	43	45	47	48
50						28	29	35
		17	22	23
25		9
0
0
-25
-50	MAC	HKG	PRI	TWN	EST	LUX	DNK	AND	SWE	LTU	CHE	NOR	IRL	LVA	CZE	NZL	NLD	AUS	MLT	KOR	ISL	SVK	HRV	DEU	ISR	SVN	SMR	CYP	AUT	FIN	PRT GBR CAN BEL ESP	Adv FRA USA	ITA	GRC SGP	JPN

Source: NBF, IMF (WEO Apr-24) | Note on shading: CAN shown in red, other G7 nations shown in blue; advanced economy is weighted average

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