KRUGGEL: Canada's deficit; that which will dictate what happens next

Over the last 9 years, excluding the Pandemic, the federal government's deficit went from $2.9 billion in 2015 to $61.9 billion in 2024. We're going to exclude the Pandemic spending because that was the time governments are supposed to spend big. 

 

Ottawa did that in 2020 and 2021. What it did not do was wind down spending in 2022. Instead, Ottawa added new government programs for things like school lunch programs, Dental Care, National Day Care, housing programs, and now Pharmacare over the last few years. Pharmacare is just starting to unfold. 

 

All of these programs cost money and over time they cost more as they grow adding new beneficiaries.

The Federal government's deficit is rapidly rising and there are no signs it is going to peak anytime soon. In December 2024 Chrystia Freeland resigned the day she was to give the Fall Economic Update. That story buried the news on the deficit for most part. A deficit that was to be held to $40 billion instead hit the aforementioned $61.9 billion mark. 

 

Today every dime generated by the GST and then some is effectively consumed by debt service charges. Here's the good news, bond yields are low today so money is cheap.

 

What if that changes?

 

Or worse, what if Donald Trump's tariffs set off a global recession? That's looking like a certainty now. Regardless of that, Canadian companies are already laying staff off, reducing hours in some cases, and canceling expansion plans and new purchasing. Even if Canada avoids a full blown recession an economic slow down is going to cut government revenues substantially.

 

If the deficit is going to get worse due to economic conditions and current spending then we need to now consider campaign promises and NATO obligations.

 

Defense spending has to rise about $22 billion a year to meet our 2% of GDP NATO commitment. That's a full 1/3 of our current deficit. Both the Liberals and Conservatives have promised tax cuts, and program spending in the neighbourhood of another $10 billion a year, give or take. So our 2026 deficit, onward could be in the $100 billion range.

 

Can we sustain that long term? The answer is no. 

 

Mark Carney and Pierre Poilievre have both promised big tax cuts, and new spending and to balance the budget. Actually, Mark Carney says he will reign in spending. Neither of them are clear or bothering to offer any details and their supporters are just fine with that.

 

The reality of our situation as a nation is going to hit hard when the election is over. The government, whoever that is and it'll likely be Mr. Carney, is going to have to deliver a budget that moves on Liberal promises while hitting a wall imposed by the deficit. 

 

Either Mr. Carney, or in the event of an upset Mr. Poilievre, they will be forced to renege on some or all of their campaign promises and start the process of cutting social programs. 

 

Yes, Dental Care, school lunches, National Day Care, pharmacare, child tax credits, housing programs, and stuff like that - some of it will go or be trimmed substantially. In fact, over the next few years it is likely a lot of those Trudeau era programs will be canceled altogether. 

 

That is the natural consequence of living off of a credit card. Eventually one hits their credit limit.

Some will say that the government can issue bonds and the Bank of Canada will buy them at a low rate. We can just print money. Venezuela, Zimbabwe, Argentina, and even Germany at one time did that just that. They ended up with hyperinflation whereby inflation was at a rate of 1,200% or more. If you thought 8.2% was bad just imagine what 1,200% looks like. A nation can't just print money. Even the United States is starting to buckle under the pressure of its unfathomable debt.

 

Printing too much money, issuing too much debt, is inflationary. 

 

No, our next Prime Minister is going to be disappointing the entire country very soon. In fact, he is likely going to be very unpopular by the end of the year.