Big-ticket spending to federal staffing cuts: 7 things to watch for in Carney's first budget

During a pre-budget speech last month, Prime Minister Mark Carney told the audience of mostly university students that his government would restore their future.

“It’s our country; it’s your future,” he told the crowd. “We are going to give it back to you.”

While an increasingly volatile world makes it entirely unclear exactly what that future will look like, the Carney government’s first budget — to be unveiled Tuesday  — will go some distance in revealing at least part of the plan.

As Canada faces what Carney has described as a more hostile and divided world, it’s time, the prime minister said, for “bold action,” “a new course,” and a “dramatically” different economic path.

A fuller picture of Carney’s map to navigate that path is still unknown. But Canadians can look for important clues in Tuesday’s budget, described by some as “generational” in its significance and expected to address the following problems:

What’s the problem?

Big investors put their money in places where they think they can make big profits, as quickly as possible.

Canada has been lagging in corporate investment for decades, for a number of reasons: declining competitiveness and productivity, slow project approval processes, high input costs, and, in recent months, questions about access to the U.S. market.

Those are major problems that are difficult to solve and perhaps even more difficult to frame in a voter-friendly way. But there’s little doubt that Carney is all in on trying to solve what is perhaps his foremost policy puzzle.

“The core of our budget strategy will be to catalyze unprecedented investments in Canada over the next five years,” the prime minister said in his pre-budget speech.

That catalyzing, however, is easier said than done. It will mean that Canada will need to offer investors the conditions for a healthy return on investment, whether it’s for a new mine, a manufacturing facility, or an existing business. That was always a challenge in a relatively high-cost country, but the climb has become decidedly more uphill after U.S. President Donald Trump started adding hefty tariffs to the equation.

The underlying challenges are not new.

As has often been said in political circles, competitiveness and productivity are killer words if you’re trying to sell the public on an idea or policy. They put people to sleep, or worse, leave the incorrect impression that employees are going to be asked to do more for less.

The problem is that those two goals are widely considered by economists to be among the most important gauges in trying to develop a stronger economy and a richer country. If a country such as Canada is more competitive, exporters will sell more, create more jobs, pay more taxes and have more room to raise wages. Prices for their goods and services will also be cheaper for Canadians to buy. Productivity means suppliers have found a way to make more for less, which makes them more competitive and profitable.

The Canadian economy clearly needs help. Statistics Canada reported Friday total annualized growth of 0.4 per cent in the third quarter.

The Budget:

As National Post reported last week, the budget will include a broad new strategy to boost Canadian businesses’ performance , including measures to allow companies to write off their new machinery and capital costs more aggressively. Those changes to the capital cost allowance (CCA) rules will affect the purchases of buildings, machinery, vehicles and other equipment, and are largely a response to Canada’s trade frictions with the United States and China, and similar changes that were made earlier this year in U.S. legislation.

There are other ways to make businesses immediately more competitive without adding bureaucracy or other costs. Ottawa could suspend scheduled changes to the Accelerated Investment Incentive (AII), another business accounting metric, or simply cut corporate income or payroll taxes.

The government has already taken steps toward trying to improve Canada’s economic performance. One step was the opening of a new “major projects office” to speed up the approval processes for mines, pipelines and other proposed investments deemed to be in the national interest. The government has already announced approvals for a first tranche of five projects , although each to some extent was already underway, and it wouldn’t be a surprise to see another batch of approvals in the budget. Another was a broad review of red tape.

Interprovincial trade barriers are another thorny obstacle for growth.

Getting rid of those costly barriers would boost the Canadian economy on a number of fronts, including reducing inflation and boosting competitiveness.

A budget announcement on this front is unlikely, however, given the lack of recent progress.

Ottawa took a first step earlier this year in eliminating the federal part of these barriers, but the ball is mostly in the provinces’ court and progress has slowed as provinces generally seem unable to give up on their typically protectionist instincts.

Competitiveness would also get a push of course from simply opening up key markets to greater competition. Sectors such as airlines, telecommunications services, poultry and dairy, banking and even a wide range of professional services are subject to various forms of protectionism.

Economists say reducing or eliminating those barriers would make the Canadian economy more prosperous and more attractive for investors. Industry Minister Melanie Joly has said the government is “bullish” on competition. The budget may well include a plan to do something about showing that intent to be more than just words.

What’s the problem?

Trump has hit Canada with punishing tariffs on sectors not covered by the Canada-U.S.-Mexico trade agreement, such as steel, aluminum, autos and softwood lumber.

That has prompted Canadian politicians and businesses to look for non-American customers. Carney used his University of Ottawa speech to set a new goal for Canada to double non-U.S. exports over the next decade.

Economists and trade analysts, however, warn that diversifying trade to other markets is a lot easier said than done. Companies and governments on both sides of the Canada-United States border have spent more than a century integrating their supply chains to their mutual advantages.  Tariffs may make things more costly and less prosperous for both sides, economists say, but the vast majority of Canadian exports will continue to flow south.

There are many reasons why existing trade patterns and supply chains are what they are and a compelling reason is required for a buyer to change suppliers, especially if it involves a new supplier on the other side of the world.

The Budget:

Canada has already invested billions in trade diversification in recent years, particularly in infrastructure and services to support exporters and in helping Canadian businesses make their strategies easier to execute. Carney has also spent much of his first six months travelling abroad, at least in part, trying to drum up more markets for Canadian exports.

It’s debatable how effective those efforts over the years have been. CIBC said earlier this year that the percentage of Canadian exports headed to the U.S. is 76 per cent, the same as a decade ago.

With the trade wars hitting the economy hard, it wouldn’t surprise many if the trade diversification files got more attention on budget day.

What’s the problem?

The economy needs more engineers, scientists, and trades people, while communities need more medical personnel and some other professionals. Depending on how many housing and major projects are approved over the coming years, the need for tradespeople — particularly when there are sometimes difficulties with some professions even working across provincial borders — could get dire.

The Budget:

Among the safest budget bets is that Finance Minister Francois-Philippe Champagne will announce spending for more apprenticeships and skills-training programs as part of a broader talent strategy aimed at adding to Canada’s roster of scientists and innovators. The government has also signalled that the budget will allocate money for increased foreign credential recognition.

What’s the problem?

Inflation, fuelled at least in part by massive government spending during the pandemic, has hit Canadians’ pocketbooks hard in recent years and it hasn’t stopped. Food inflation, already up nearly 20 per cent since 2021, climbed four per cent in September year over year. C anadians have seen a double-digit percentage increase in rental rates and housing prices in recent years.

The Budget

In September, the government announced its $13-billion Build Canada Homes program designed to increase the supply of housing. On the demand side, Ottawa has already cut the GST on the purchase of new houses under $1 million by first-time homebuyers.

Grocery prices are a tougher target, and the government has already cut personal income taxes earlier this year, reducing the lowest bracket from 15 per cent to 14 per cent.

Both issues are contributing heavily to many Canadians simply not having enough to make it through the month. With a wide array of policy levers to affect Canadians’ wallets, it’s likely the budget will include multiple measures to address what is for many Canadians — not to mention the Opposition Conservatives — their number one issue.

What’s the problem? 

Canada has largely relied on its allies and geographic proximity to the U.S. for its defence strategy for decades. But Trump’s tariffs and frequent vows to focus on “America first” may have triggered a change in attitude.

Carney has vowed to hit the NATO target this year of spending two per cent of GDP on defence. He even went a big step further, saying that Canada will allocate at least five per cent of GDP on defence within a decade, although that will include spending on dual-purpose infrastructure that meets both military and civilian purposes.

The Budget:

Carney already announced a $9-billion investment in the military in June, including the largest pay increase in more than 25 years for Canadian Armed Forces personnel. That was just a few months after the Defence Department announced that it would spend an estimated $3 billion on over-the-horizon radar purchase from Australia. (That estimate has since reportedly jumped to $6 billion.) Ottawa also announced earlier this year that it was moving the Canadian Coast Guard and its $2.8-billion budget under the Department of Defence.

Depending on how these expenditures are accounted for, Ottawa is already within striking distance of its NATO target of two per cent.

If the budget includes an announcement about the purchase of some military equipment, that would put Canada over the top and allow the Carney government to claim a win of sorts. Either way, the budget will account for big chunks of increased defence spending.

The government may also want to make a move or two to show Trump that it’s still interested in border security. Money laundering, online scams and other Internet crimes are also a growing problem that may well get some budget attention.

What’s the problem?

Federal spending under the Liberal government has been a runaway train, growing over the past decade by more than seven per cent a year.

“We spent faster than our economy was growing,” Carney acknowledged recently. “So, our government is changing that.”

Growth in the civil service has been part of the equation, growing by more than 100,000 since 2015, with the largest growth in executive staff.

E-government analysts, meanwhile, say governments should be able to do more with fewer people if they’re investing in and using digital technology properly.

The Budget:

Carney has been clear his plan is to cut spending where possible, including on the number of civil servants, and reallocate that money to higher-priority areas.

Don Drummond, a former high-ranking executive with the Department of Finance and former chief economist at TD Bank, said he’ll be looking in the budget for the extent of the reallocation of government spending, and of course the size of the deficit.

Earlier this year, Champagne told ministers they should cut program spending by 7.5 per cent, or about $15 billion collectively, over the next year, growing that figure to 10 per cent in 2027-28 and a 15 per cent reduction a year later.

Carney had said earlier that the government would rely on attrition to reduce the public service payroll. But, as National Post reported last week , the budget will include a broader plan that includes early retirement packages, moving employees within the government, and layoffs.

The budget will likely also show how much the Carney government has been able to find in cuts so far and may also offer a plan to dig deeper to try to find further savings.

A big move, especially symbolically, would be if Carney announced that he was actually shutting down a government department or agency, or at least folding, say, two departments into one more streamlined unit. One government source told the Post that there has been no talk of anything like that planned.

What’s the problem?

With its runaway spending and lagging economic growth, the federal government has been racking up mountains of red ink in recent years, and further outlays on defence, affordability and housing won’t come cheap, even if some are framed as long-term investments.

The Budget

That means Canadians can expect another year with a high deficit. The C.D. Howe Institute, a leading think tank, forecast earlier this year that the Carney government would post a deficit of more than $92 billion if it followed through on all of its campaign promises. That would mark the second-highest deficit in Canadian history, topped only by the Liberals’ $327.7 billion shortfall from the pandemic year of 2020–21.

The government has been trying to inoculate itself in advance from this part of the budget coverage. Carney has been saying it’s a time for “bold” action, while Champagne has emphasized that international organizations have pointed to Canada as one of the few countries with the fiscal room to spend more.

The budget is also expected to feature for the first time a separation between day-to-day operational spending and capital investments, which could be anything deemed to be designed to boost long-term growth. The government says this change will make it easier for Canadians to distinguish between the “spending” and the “investments.” Critics say it’s just a trick, so the government will be able to say that it’s met its goal of balancing the operational budget within three years, instead of dealing with the actual budget deficit.

National Post

stuck@postmedia.com

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