The Morning After: A Post-Binge Federal Shadow Budget for 2023

With the worst of the COVID-19 pandemic behind us, a concerning trajectory of federal spending has become clear. The economic rebound and higher inflation have boosted federal revenues, and the government is spending almost all the new money. While some new spending is arguably effective in improving Canadian wellbeing, most is not. Federal compensation costs are ballooning, while the government’s ability to make policy and deliver services is static or declining. Too many of its commitments do not respect long-term budget constraints – indeed, many threaten to aggravate those long-term constraints by distorting economic activity and requiring tax increases that will discourage work, investment and innovation. This 2023 Shadow Budget changes course. Canadians need a federal government that spends less and better, taxes more intelligently, and sets a fiscal course that will avoid tax increases driven by excessive spending and borrowing. Recent federal budgets have buried the key numbers – the government’s financial position and projections for revenues and expenses, deficits and net debt – in annexes after hundreds of pages of repetition and political messaging. To promote transparency and emphasize the seriousness of the government’s fiscal thinking and commitments, this 2023 Shadow Budget puts those numbers up front. Table 1 presents our outlook based on the government’s 2022 Fall Economic Statement (Canada 2022a), with the projected impact of this Shadow Budget’s measures and the resulting new trajectories for the bottom line and the federal government’s accumulated deficit. Table 3 at the end provides the full list of this Shadow Budget’s measures. Key features of the Shadow Budget are changes to government operations to reduce reliance on outside consultants and limit growth in federal payroll. It proposes higher taxes on consumption, partially offset by investment incentives, to support economic growth, environmental goals, and intergenerational fairness. It contains measures to improve Canadians’ ability to finance healthcare expenses and retirement. Critically, it ensures a sustainable path for federal and national finances. After small increases in 2023, reflecting temporary net impacts of budget initiatives and a weak economy, the deficit and the ratio of net debt to gross domestic product (GDP) will decline decisively. Deficits will give way to surpluses in fiscal year 2025/26. The combination of growth-enhancing and fiscally prudent policies will redress the damage COVID has done to federal fiscal capacity, and provide more resources Canadians will need to address an ageing population, climate change and the energy transition, subsequent pandemics, and challenges we do not yet foresee.