Justin Trudeau's Liberal government, propped up by an arrangement with NDP Leader Jagmeet Singh, announced $59.5 billion in new spending over the next five years as part of their Budget 2023 announcement Tuesday. They claim it is "narrowly focused" in its promise to find savings in public service and increase tax revenues.
Finance Minister Chrystia Freeland said the budget has three main focuses: the clean economic transition, health care and cost-of-living relief.
To finance these priorities, the Liberals pledged $9.8 billion in savings within the public service and a range of tax measures aimed at wealthier individuals and corporations that would increase revenues by $11.7 billion.
Freeland plans to slash some $15.4 billion in spending over the next five years through "targeted reductions," including an effort to curb the use of "professional services" and management consultants and a reduction in travel expenses.
She's also promising to levy a 2% tax on stock buybacks, hike the "alternative minimum tax" to make the wealthier pay more, and tax dividends received by financial institutions — three initiatives projected to raise $11.6 billion over the next five years.
Roughly 70% of the $43 billion in net new spending announced in Budget 2023 is earmarked for health and dental care over the next six years, including $13 billion over five years to extend dental services to lower-income Canadians who don't already have access to a dentist.
"No Canadian ever again will need to choose between taking care of their teeth and paying their bills at the end of the month," said Freeland. "There are significant and necessary investments."
However, a faltering economy means Ottawa will collect $5.7 billion less in revenue this fiscal year than it initially projected — a development that blows a big hole in the federal treasury.
Amid a slowing economy and high inflation, Freeland promised fiscal restraint and reiterated her government's commitment to helping Canadians.
"Our country has a proud tradition of fiscal responsibility. That is a tradition we are determined to uphold," said the finance minister while presenting the budget.
Canada's debt-to-GDP ratio is expected to rise in 2023/24 from 42.4% to 43.5%, then decline to 39.9% in 2027/28. The federal government's fiscal decisions should be guided by its fiscal anchor, a declining debt-to-GDP ratio in the medium term.
Jimmy Jean, Desjardins' chief economist, said the budget shows Ottawa is trying to "strike a balance" not to fuel the flames of inflation. The host of affordability measures, including an additional boost to the GST rebate, are considered relatively modest.
"But at the same time… you're not seeing the deficit close by the end of the projection [period]," said Jean.
Freeland's fiscal plan projects the deficit will be $40.1 billion in 2023/24 — up from the $30.6 billion she said it would be just last fall.
As the Canadian economy slows, the fiscal and economic projections in the budget have been downgraded from the fall fiscal update to account for a shallow recession this year.
Jean said the likelihood of a deeper recession has increased amid high-interest rates. A sharper downturn would mean fewer tax revenues to finance the government's priorities.
"You've got to question what [the Liberals] are going to do if there's a deeper recession than expected," said Jean.
The Bank of Canada has aggressively raised its key interest rate over the last year, reaching 4.5%, the highest since 2007.
High-interest rates are already slowing the economy, which posted zero growth in the fourth quarter.
Based on a survey of private sector economists, the economic projections suggest real GDP will grow by 0.3% this year. The government's downside scenario, which offers a more pessimistic outlook, estimates a contraction of 0.2%.
As the economy slows, the budget projects the unemployment rate will peak at 6.3% by the end of the year. The February unemployment rate, the most recent month available, was 5%.
The economic projection also finds inflation is expected to fall below 3% in the third quarter before returning to the Bank of Canada's 2% target in 2024.
Jean said the budget also hinges on the federal government following through with public service cuts, which is considered challenging. He said there are questions regarding how much the federal government will successfully raise from high-income earners on the tax front.
"Those are very sophisticated individuals that can find ways to reduce or optimize their taxes," said Jean.