Most of the attention on last month’s fall economic statement centred on the bombshell resignation of then-finance minister Chrystia Freeland but—as the political turmoil sparked by her departure continues to unravel—serious questions remain about how and why the government missed its deficit target, adding to a pattern of the Liberals failing to maintain fiscal anchors since coming to power in 2015.

While the government has pointed to what it calls two “one-time” expenses that caused the deficit overrun, Parliamentary Budget Officer Yves Giroux told The Hill Times that, based on the documentation Ottawa has publicly released to date, “we can’t say for sure” whether those two items fully explain why the deficit grew by around 50 per cent.

On Dec. 16 and 17, respectively, the government tabled the 2024 fall economic statement (FES), and the public accounts for the 2023-24 fiscal year. The documents revealed that the federal deficit had ballooned to $61.9-billion, well beyond the $40-billion pledged for that fiscal year promised by the Liberal government in its April 2024 budget.

The government blamed two contingent liabilities that had come onto the books after the April budget: $16.4-billion related to Indigenous settlements, and $4.7-billion tied to COVID-19 costs. The latter includes writing off expired vaccines, as well as COVID-era loans the government no longer expects to recover.

“Absent these expenses, the projected 2023-24 budgetary deficit would have been roughly $40.8-billion, compared to Budget 2024’s forecast of $40-billion,” says the document.

Contingent liabilities are expenses that the government expects to incur in the future because of events it believes are likely to occur. For example, once the government expects it may be forced to pay out a legal settlement down the road, it must book that expense into the budget in the fiscal year when it becomes aware of this future obligation, even though the payout may be years away. This must be done once the government has an estimate of what it likely owes, and believes there is a 70 per cent or greater likelihood that it will be obligated to pay.

However, Giroux says not enough information was presented—in either the FES or the public accounts—to tell if the two liabilities are truly solely at fault.

“We don’t know for sure that the increase in liabilities is the determining factor in the government missing its deficit target,” said Giroux.

Giroux said that on Dec. 18—the day following the release of the public accounts—his office sent an inquiry to Finance Canada for additional details.

“We are waiting for an answer,” said Giroux on Dec. 19. “So right now, we can’t say for sure whether it’s just the one-time events—the liabilities—or if it’s that and other elements. For example, direct program expenses and a decrease in revenues.” The PBO expects to address this in a report in the coming weeks.

Giroux noted that the FES reports government revenues for 2023-24 came in $5.5-billion lower than forecast in the budget, meaning that is also part of the story of how the target was missed, despite the government having placed the emphasis on the two contingent liabilities.

Booking these claims into the 2023-24 fiscal year also suggests the government became aware of them before its fiscal year end on March 31, 2024, so it is unclear why they were not included in the budget released April 16.

The Hill Times sent detailed questions to Finance Canada about the contingent liabilities, and the role they played in the government missing its deficit target.

Page 187 of the fall economic update provides a summary of economic and fiscal developments that occurred since the Liberals publishing their budget, including a line on direct program expenses for 2023-24, showing they increased by only $16.4-billion.

In an emailed reply, a Finance Canada official told The Hill Times only that “all contingent liabilities are associated with this line item.” Given that that government said it added a total of $21.4-billion in contingent liabilities, this indicates there are other offsetting items on this line that the government did not provide details about in its reply.

The official did not address additional questions about what other factors affected this line. In particular, they did not say whether there was already some money booked to that fiscal year to cover these liabilities, or whether other program savings had affected that line.

Giroux said that contingent liabilities have been growing in recent years, and require greater attention.

“It’s sound practice to disclose these,” said Giroux. However, he said, the government should be able to better anticipate such expenses, and not add them to the books so late in the fiscal cycle.

“It’s a bit surprising to see these claims being reassessed, or new claims showing up when the government has been engaged on a path to reconciliation for at least nine years,” said Giroux. “So maybe these are not just one-time events, if they are recurring and reappearing every year … Maybe it’s rather a policy direction that the government is taking.”

‘A lack of discipline’

Keeping the deficit to $40-billion was one of three key fiscal anchors laid out by Freeland (University—Rosedale, Ont.) in April 2024, along with commitments to maintain a declining debt- and deficit-to-GDP ratio. The other two budget commitments were maintained by narrow margins.

Eugene Lang, a former Finance Canada official and ministerial staffer in the 1990s, said the government of Prime Minister Justin Trudeau (Papineau, Que.)—who announced on Jan. 6 his plans to step down in the coming months—has a pattern of missing fiscal anchors.

Lang was one of several public finance experts who said this pattern reduces the Liberal government’s credibility when it makes future fiscal commitments.

“They’ve abandoned all of them,” said Lang, who is now a policy professor at Queen’s University. “And this is from the beginning, under two different finance ministers.”

Lang said the modern concept of a fiscal anchor in Canadian politics was established in the 1990s during the era of then-prime minister Jean Chrétien and then-finance minister Paul Martin. At that time, the Liberal government said it would reduce the deficit to three per cent of GDP within three years—a target it not only met, but exceeded, when it balanced the budget.

The Trudeau government, noted Lang, came to power with a commitment to cap deficits at $10-million, balance the budget by 2019, and reduce the debt ratio to 27 per cent of GDP. The government’s failure to meet these targets in the pre-pandemic era began the pattern of it failing to maintain its fiscal anchors throughout its mandate, said Lang.

“Other governments have had them, and they’ve adhered to them, except for this government,” said Lang. “You could argue it’s a unique feature of Trudeau’s government that they don’t take these things seriously.”

He said one reason for this outcome is due to Trudeau’s finance ministers appearing not to have had the same level of “autonomy and authority” as those under former prime ministers Brian Mulroney, Chrétien, Martin, and Stephen Harper.

Crucially, said Lang, Trudeau’s finance ministers seem not to have been empowered to say “no” to new spending proposals.

Despite the rivalry between Chrétien and Martin, “everybody in the government knew that the finance minister was fully backed up by the PM, and that there was no going around Paul Martin appealing for some spending,” said Lang. “Chrétien made that very clear throughout his time in office. They didn’t like each other … but everybody knew when it came to spending decisions, fiscal policy decisions, there was no daylight between the two.”

He said the public falling out Trudeau had with Freeland, and also with his first finance minister Bill Morneau, highlights how spending decisions were “run out of the Prime Minister’s Office in a way we’ve never seen before.”

University of Calgary economist Trevor Tombe said regardless of what fiscal anchor a government chooses, it’s important to maintain it because missing it shows “a lack of discipline.”

“When people talk about discipline, usually they mean, ‘government’s too big,’” said Tombe. “Whatever your preferences are around big governments or small, if you lay out a fiscal plan … but every single time you update that plan you change it, that reveals a lack of discipline.”

He said fiscal anchors need to be “simple” and “clear,” because they play a role in helping the public understand and assess a government’s choices.

Missing fiscal anchors is a problem that “characterizes” the current government “ever since it took office,” said Tombe.

Pollster Nik Nanos said the measure that Canadians are most likely to care about is whether the deficit is going up or down because this is similar to what voters focus on in their personal finances.

“It doesn’t mean that [government has to] balance the books. But what people want to see is a trend,” said Nanos. “So what is the trend under the Liberals right now? The trend in terms of debt is moving in the wrong direction.”

Giroux said that by “so quickly blowing up” one of the three key fiscal anchors the government set in budget 2024—which was delivered only months earlier, and after the end of the fiscal year in question—it “undermines the credibility of the remaining two.”

“It suggests that the other two are not on as firm or solid ground as the government itself indicated,” said Giroux. “It suggests that exceeding their own deficit targets is not something that worries the government.”

“If it’s inconvenient to maintain them, they will consider abandoning them. It’s not the binding constraint.”

icampbell@hilltimes.com

The Hill Times

 

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