Canadians can’t say they weren’t warned. Before the 2015 federal election, Conservative campaign ads repeatedly argued Justin Trudeau was “just not ready” to be the prime minister of a G7 economy. Obviously not everyone agreed with such a claim, as the Liberals won a majority government. But if anybody who did think Trudeau was ready back then surveys the economic landscape over the past eight years and still affirms their past judgement to have been correct, they cannot be serious. And if anybody else believes Trudeau has gained sufficient wisdom over his time in office such that he is about to implement policies that will dramatically improve Canada’s economic growth and standard of living, they have completely lost the plot.
The numbers do not lie. Canada’s economic and fiscal performance over the past eight years has been downright miserable, and the outlook is bleak. One single statistic best illustrates this fact: from the third quarter of 2015 through the second quarter of 2023, real gross domestic product (GDP) per capita increased by 12.5 percent in the United States versus only 1.6 percent in Canada. Put another way, if Canada’s economy had tracked with the United States since Trudeau took office, national income per Canadian would be 11 percent higher than it is currently. GDP per capita has long been considered the most useful and convenient way to compare national living standards. Most recently, Canada has experienced four consecutive quarters of declining GDP per capita, while the United States has had four consecutive quarters of growth.
The starkly poor outcome in this key economic metric – alongside strong evidence that it is possible to do much better – has given the prime minister and his cabinet no pause. The Liberals’ current playbook is to deny reality, insist they have produced splendid results, and increase the severity of all the deleterious policies that produced these miserable outcomes in the first place. That is, inflationary spending, regulatory expansion, punitive taxation and net-zero emissions enthusiasm. The nincompoops have learned nothing.
Excess Spending: $127 Billion pre-Covid – Now Another $80 Billion Extra per Year
In describing the Trudeau Liberals’ economic policies, it makes the most sense to begin at the beginning. Before they were first elected, the Liberals promised modest, temporary deficits, supposedly to make important improvements to government services and increase economic growth. But the actual deficits have greatly exceeded the levels originally promised, have been anything but temporary, and the improvements to services and economic growth have not been forthcoming.
The Conservatives’ last federal budget in 2015 planned spending of $263.2 billion in the 2015-16 fiscal year (ending March 31); despite coming into office already halfway through it, the Liberals managed to blow through an extra $10 billion to end the year at $273.6 billion. Then in their first budget, for 2016-2017, the Liberals planned program spending of $291.4 billion, growing to $314.2 billion by 2019-20 – amounting to $66.3 billion in new spending versus the fiscal plan they inherited. But even this inflated budget proved too small for the spending-addicted Liberals.
The Liberals’ current playbook is to deny reality, insist they have produced splendid results, and increase the severity of all the deleterious policies that produced these miserable outcomes in the first place.
Budget 2016 planned for $1,218.9 billion in cumulative program spending over four years. The Liberals actually spent $1,268.9 billion – $50 billion more. By 2019-20, annual program spending was $349.1 billion, which was $34.9 billion or 11 percent above what they originally planned and $46.5 billion or 15 percent above the Conservatives’ 2015 fiscal plan. Putting it all together, even before the pandemic began, the Liberals spent an extra $126.7 billion over four-and-a-half years and inflated annual spending by 15 percent above the fiscal plan they inherited.
But this was just the prelude; what has happened since should shock everyone. From $349.1 billion in 2019-20, federal spending skyrocketed to $623.8 billion in 2020-21 and $479.0 billion in 2021-22. Even the lower of these two figures is close to double the spending of the Conservatives’ last year in office. A full assessment of spending during the pandemic is beyond the scope of this essay, but Fraser Institute economists Jake Fuss and Tegan Hill conclude in a recent analysis that, “Canadian COVID programs such as CEWS and CERB were ripe with problems including overpayments, funds provided to individuals and businesses not in genuine need, and excessive amounts of support that went above what was required to stabilize incomes.” As to what proportion of pandemic-specific spending should be considered waste, they put it at a minimum of 25 percent.
While any such estimates are debatable, what is not up for debate is that the Liberals took advantage of the pandemic to permanently and dramatically increase the size, scope – and cost – of government. In Budget 2019, they planned for spending of $358.4 billion in 2022-23 and $369.1 billion in 2023-24. With the pandemic firmly in the rearview mirror, the latest figures show spending of $445.7 billion in 2022-23 and $453.0 billion budgeted in 2023-24. The Liberals, in other words, abused the pandemic to ram $80 billion to $90 billion more into the annual federal budget on a permanent basis.
A main result of this spending explosion is an increase in federal debt. Even pre-pandemic, the Liberals increased the national debt by $100 billion over the fiscal plan they inherited from the Conservatives. Being generous, we will leave aside the two pandemic years and accept the claim that these spending increases were crisis-driven exceptions (of course, the debt added in those years is real and will have to be repaid one day).
But, just as post-pandemic Budget 2023 permanently elevated spending over the pre-pandemic budgets, so too did it significantly increase the growth in debt. In Budget 2019, the Liberals projected they would increase net federal debt by $25 billion in the two fiscal years ended 2023-24. The latest estimate is that it will increase by $95 billion. Increasing federal debt itself puts upward pressure on government spending, since it increases the government’s annual interest costs even if interest rates remain low and stable.
When it comes to government budgets, Nobel Prize-winning economist Milton Friedman wisely counselled, “Keep your eye on one thing, and one thing only: how much government is spending, because that’s the true tax…If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing.”
Canadians today are paying for excess Liberal spending in all three ways Friedman identified. In terms of taxes, there have been: an income tax hike on top earners (with unhappy results, as documented in this C.D. Howe Institute study), an annually escalating carbon tax, special taxes on financial institutions and banks’ dividend income, and a share buyback tax. Paying for spending through borrowing is evident from the increase in debt. And all Canadians have been hammered by inflation.
Inflation: Raising Average Prices by an Extra 9 percent
When Statistics Canada released June 2023 inflation data showing the consumer price index (CPI) at only 2.8 percent above the June 2022 level, Finance Minister Chrystia Freeland boasted, “Canada’s plan to bring down inflation is working.” A reasonable person might wonder why, just a year earlier, the same government with the same plan oversaw annual inflation of over 8 percent. Whatever the reason, Freeland remarked that 2.8 percent annual inflation “should provide a lot of relief to Canadians.”
But Freeland’s cock-a-doodle of victory provided no actual financial relief to the many Canadians for whom home ownership is out of reach or who struggle to afford necessities. Lower inflation doesn’t mean prices are coming down; they’re simply rising more slowly than before. That’s no “relief.” Freeland’s boast also proved premature. The June 2023 CPI was only 2.8 percent above June 2022, but the July 2023 data showed a 3.3 percent annual increase – higher than the Bank of Canada’s target range of 1 to 3 percent – and by August 2023 annual inflation had climbed back to 4.0 percent.
Importantly, even if inflation remained below 3 percent, this would not undo the damage of high inflation over the past three years. The average price level is today 9 percent higher than it would have been if CPI had followed its pre-2021 trend. And unless the country were to enter a period of deflation, the average price level will remain 9 percent higher than it would have been without this excess inflation.
A notable fact about Liberal policies that claim to be reducing the effects of inflation is that they are themselves all inflationary. Take, for example, the federal government’s $2.5 billion in “grocery rebate” handouts to 11 million Canadians, which it said would “provide inflation relief.” Leave aside the observation that if, by the Liberals’ own admission, more than one in four Canadians needs government help to buy groceries, this cannot be a glowing endorsement of their economic management. In fact, the handouts have nothing to do with groceries and, by increasing the amount of money but not the amount of goods and services in the economy, are in fact inflationary. (For more on how inflation works and what causes it, please see this C2C article by Philip Cross.)
The Liberals are now contemplating a grocery tax to increase the affordability of groceries. It is a beyond-preposterous proposal and there are only two possible explanations for it: political calculation and utter stupidity. These are not mutually exclusive.
The Outlook: More Pain to Come
Recall that since the Liberals came to power in 2015, Canada’s income per capita has grown so slowly that, if we use the United States as our benchmark, it is 11 percent lower than it ought to be. This is an unfortunate statistic that, even more unfortunately, is unlikely to materially improve. In October 2021, the Organisation for Economic Co-operation and Development (OECD) published long-term projections for real GDP per capita for its 38 member countries. The average growth across these developed economies for the 40 years from 2020 to 2060 is projected at 70 percent. The United Kingdom’s outlook is 62 percent growth; the United States’, 60 percent. Firmly in last place out of 38 countries is Canada, at 46 percent expected growth over 40 years.
That the outlook for Canada is so dismal should surprise no one. In the first place, the performance of the past eight years has been pretty awful. The fiscal policies that produced these awful results have become more awful; why should economic outcomes improve? In the second, productivity growth is driven by business investment. What encourages long-term business investment is light and predictable taxation and regulation. Over the past eight years, however, Canadian taxation and regulation have been overbearing and unpredictable.
As a C.D. Howe Institute study last year concluded, ‘Since 2015 Canada’s stock of capital per available worker has been declining and its rate of gross investment per worker has been well below that in the United States and other OECD countries.’
Economic policy is today determined by a cynical government’s reading of populist sentiment among its voters, instead of careful reasoning. Heavy borrowing along with higher interest rates that, in turn, will increase government debt-servicing costs, have increased uncertainty about future taxation. Industries or companies perceived to be too profitable are singled out for political demonization and special taxation.
The result is that businesses and entrepreneurs are reluctant to invest in Canada. As numerous studies have documented, business investment in Canada was not strong even in 2015. But over the past eight years, things have gone from bad to worse to ugly. As a C.D. Howe Institute study last year concluded, “Since 2015 Canada’s stock of capital per available worker has been declining and its rate of gross investment per worker has been well below that in the United States and other OECD countries.”
Indeed, the latest data show that from the third quarter of 2015 through the second quarter of 2023, the change in real business investment (in non-residential structures, machinery, equipment and intellectual property) relative to labour force growth has been an 11.0 percent increase in the United States versus a 4.2 percent decline in Canada.
Climate Targets: Targeting Economic Losses
Considerable economic harm and discouragement of new business investment has been caused by the Liberals’ enthusiasm for climate-related policies. A 2021 Fraser Institute study by Ross McKitrick and Elmira Aliakbari estimated that the federal carbon tax would cut Canada’s GDP by 1.8 percent by 2030. That will mean approximately $60 billion in foregone economic activity per year. Adding to the damage: over $120 billion in climate change spending by the Liberals to date, many billions of dollars more in future spending, a forthcoming ban on the sale of gasoline-powered cars, and sundry other regulatory initiatives. And still the Liberals are intent on making things much worse.
In June Jonathan Wilkinson, the federal Minister of Natural Resources, commented on the Canada Energy Regulator’s report on achieving net-zero emissions by 2050, saying that, “Canada faces a choice: we can either lead in seizing the historic economic opportunities associated with building a global net-zero economy, or we can let them pass us by, with all the attendant consequences of being a late mover. I strongly believe that Canada must lead: we must build a net-zero economy.”
Some opportunity! The regulator’s projections show that relative to the “current measures” baseline – a baseline already stuffed full of economically harmful policies – the push for net-zero would, among its many effects, increase inflation, reduce commercial floor space, slightly shrink average home sizes and materially reduce incomes.
Specifically, cumulative growth in real GDP per capita from 2022 to 2050 is projected to be 21.1 percent in the “current measures” scenario, 16.8 percent in the Canada net-zero scenario (which involves Canada but not other countries meeting their emissions commitments), and 12.1 percent in the global net-zero scenario (in which the rest of the world joins Canada in this impoverishing experiment).
Put another way: already having the worst economic outlook among all developed countries, pursuing net-zero emissions would eliminate an additional 20 percent to 40 percent of Canada’s projected growth. That the Liberals consider this a “historic economic opportunity” should not improve the equanimity of Canadians unhappy with their poor economic results of recent years and troubled about the economic outlook.
What the future holds: Having already been tagged with the worst long-term growth rate in the OECD, the Trudeau government’s net-zero plan will leave Canadians even worse off by eliminating an additional 20 percent to 40 percent of potential growth; pictured, a broken wind turbine in Kent Hills, New Brunswick from 2021. (Sources: (graph data) Canada’s Energy Future 2023, by Canada Energy Regulator; author’s calculations; (photo) Steve Shannahan/CBC)
Conclusion: Still Not Ready
On the heels of their September caucus retreat, and with their polling numbers in the dumpster – the result of inevitable backlash against their failed policies – the federal Liberals returned to the first parliamentary session of the fall and were promptly hammered for making life in this country less affordable than ever. Trudeau replied to these concerns with some mumbo-jumbo about Conservatives restricting abortion, denying climate change and planning to put assault weapons on the streets. He insisted the Liberals are “delivering real results.”
That the Liberal government’s results are real, no one doubts. That they are any good, no serious person can believe. Trudeau is governing with his eyes closed. After eight years, he is still not ready.
Matthew Lau is a Toronto writer specializing in economic and financial issues, and a regular contributor to the Financial Post.
All charts prepared by the author using indicated source materials.
Source of main image: Shutterstock.
