Mark Carney’s fiscal plan may simply be some creative accounting

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Jake Fuss is director of fiscal studies at the Fraser Institute.

Mark Carney is a leading contender to be the next Liberal party leader and Canada’s next prime minister. New details about his fiscal policy plan show a potential improvement from the Trudeau era, but the approach falls well short of what Canada needs.

Over the last decade, the Trudeau government has dramatically increased the size and role of the federal government in the economy, with the six highest years of per-person (inflation-adjusted) spending in Canadian history (2018 to 2023). To finance this spending explosion, the Trudeau government has raised taxes and borrowed a projected $1.1-trillion. If Mr. Carney wins the Liberal party leadership in March, he said his government would review program spending and cap the size of the federal workforce, which has grown by more than 40 per cent during Mr. Trudeau’s tenure. These are steps in the right direction. But crucially, Mr. Carney also plans to split the federal budget in two and create an operating budget and capital budget. By dividing operating and capital spending, Mr. Carney proposes a less transparent and less understandable budget. He’ll make it significantly more difficult for Canadians to track their tax dollars and evaluate the state of federal finances.

Specifically, according to Mr. Carney, he’ll run a “small deficit” in his newly formed capital budget that includes long-term spending on military equipment, clean energy, infrastructure and housing. (In other words, he’ll continue to rack up debt and fuel debt interest costs, which will reach a projected $53.7-billion in 2024/25.) And he says he’ll balance the new operating budget – which will include bureaucrat salaries, cash transfers to provinces and federal benefits (e.g. Old Age Security) – within three years. But there’s a problem: Mr. Carney’s math doesn’t add up. He plans to keep Trudeau’s national $10-a-day daycare and dental care programs. He’ll cap growth in the federal bureaucracy but won’t reduce its size. He won’t touch benefits such as employment insurance or Old Age Security or reduce cash transfers to provinces. And he’ll increase defence spending. With all these carve-outs for existing spending, it’s very difficult to see how a Carney government would balance the operating budget in three years.

To achieve this goal, he’ll be tempted to recategorize some operating expenses as capital expenses. For example, to meet NATO’s spending target of 2 per cent of GDP, Mr. Carney could (inaccurately) categorize some defence spending as capital spending. Consequently, Mr. Carney’s “small” capital deficits would quickly turn into large deficits. This would also be reminiscent of Mr. Trudeau’s promise in 2015 for three years of “modest deficits” before he abandoned that pledge almost immediately after his election. The end result would be the same – more deficits and more debt.

On the positive side, Mr. Carney has promised to cut middle-class taxes and scrap Mr. Trudeau’s proposed tax hike on capital gains. These moves would leave more money in the pockets of Canadians. Yet his tax reform plan also doesn’t go nearly far enough. Canada would still be markedly uncompetitive compared to peer countries on personal income taxes, and middle of the pack for taxes on businesses and capital gains. Mr. Carney should instead take a page out of Jean Chrétien’s playbook and reduce taxes more broadly to improve incentives for entrepreneurship, investment and job creation.

Mark Carney’s fiscal plan may represent a potential improvement from the Trudeau years, which featured record-high levels of spending and debt accumulation. But there are serious risks to his approach, which include an accounting change that may simply move red ink from one budget to another. Canada needs broad-based tax reductions and federal budgets that are truly balanced.