Ottawa’s changes to immigration flows are the latest in a series of developments that will subject the governing Liberals – already in a politically precarious position with their minority government – to increasing fiscal pressure this fall, experts warn.
With a possible economic downturn looming over a paralyzed House of Commons, some forecasters warn the Liberals could sink deeper into deficits in an update to the fiscal outlook.
Prime Minister Justin Trudeau and the Liberal Party trail the opposition Conservative Party in the polls, and Trudeau himself has been the target of a revolt within his party, as some members of the group seek to have the leader step aside. calls that until now have been resisted. .
The House of Commons remains stuck in a procedural deadlock despite the Liberals surviving confidence votes last month, following the dissolution of the bid and confidence agreement with the NDP last month.
Governments typically present an autumn economic statement around November that updates their vision and any interim fiscal plans between budgets, but it is not a legal requirement and it is not clear when, if at all, it could happen.
Darrell Bricker, global executive director of Ipsos Public Affairs, tells Global News that any economic statement the Liberals put forward this year will be seen through the lens of a minority Liberal government and leader who are struggling to gain political traction.
The problem, he explains, is that conservatives are still traditionally seen as better stewards of the economy, while liberals fall into a more progressive camp that is in touch with the social needs of the electorate.
“They are generally seen as compassionate and genuinely interested in helping Canadians. But when it comes to managing the money that goes into it, they’re not considered particularly good at it,” Bricker says.
Chrystia Freeland, Canada’s deputy prime minister and Liberal finance minister, has attempted to tell this story to voters as recently as Tuesday.
In her weekly economic update, she attempted to criticize the “austerity” she said the Conservatives would offer, while the Liberals see the need to “make investments in Canadians.”
Meanwhile, Conservative leader Pierre Poilievre has floated a slogan of tax cuts and policies he describes as focused on “common sense,” and recently said Monday he would eliminate the GST on newly built homes under $1 million. if he became prime minister.
The right mix for governing is often somewhere in between astute accounting and social support, Bricker says. But on issues like affordability and housing — the issues most important to voters — he says the incumbent government is still lagging behind.
“The Liberals are on the wrong side of this in the sense that they’re not seen as managing money particularly well, but they also don’t have the same priorities as Canadians right now,” he says.
Bricker says that with the Bloc Quebecois pushing to increase Old Age Insurance as part of an ultimatum to continue supporting the Liberal minority, the government will feel pressure to increase spending even further in the coming months.
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“They will be under a lot of pressure and I don’t think Canadians should be surprised if they give in to that pressure,” he says.
Concerns that the Liberals may not be the most capable hands at the wheel of Canada’s economy arise despite positive developments on that front.
After hitting more than 40-year highs in 2022, inflation has recently cooled below the Bank of Canada’s 2 per cent target. And the central bank itself has recently accelerated the pace of its rate cuts, taking an exaggerated 50 basis point step in its most recent decision.
While unemployment has risen, layoffs have been few and Canada’s economy has so far managed to avoid a recession.
But signs of a “soft landing” have not led to a resurgence in the polls for the Liberals.
“Governments tend to be punished when things go wrong on these fronts. They tend not to be rewarded as much or as quickly when things tend to improve,” Bricker notes.
And not all the latest economic winds are blowing in favor of the liberals.
Randall Bartlett, senior director of Canadian economics at Desjardins, tells Global News that while lower interest rates are typically a boon for governments that eventually see lower costs on their debt, alleviating inflation actually means lower revenues for Ottawa in the short term.
Falling interest rates and expectations of a modest rebound in Canadian economic output in the coming years will bode well for Ottawa’s fiscal record, he adds. But those increases are not likely to stop the Liberals from deepening national deficits, he maintains.
Bartlett authored a report released by Desjardins on Tuesday warning that the federal government’s spending commitments have skyrocketed since the last 2024 budget presented in April. The latest federal fiscal monitors also show deficits are above what the Liberals last projected for the current and previous fiscal years.
Among the costs added to the bottom line is the Liberals’ promise to meet NATO defense spending targets of 2 per cent of GDP. That alone could be enough to add $10 billion to the federal deficit by 2028-29 and breach the Liberals’ fiscal anchors for years to come, Bartlett wrote.
Immigration cuts could deepen deficit
And then there are the recently accelerated plans to curb population growth in Canada. The Liberals have slashed targets for the number of new permanent residents entering the country, essentially aiming to freeze population growth for two years.
While these measures aim to relieve pressure on the housing market and other government services, they also risk decreasing the tax base and could affect overall GDP.
“This slowdown in the growth rate of real GDP will weigh on the federal government’s income more than it will save them on expenses. And ultimately, that will contribute to a larger deficit than the federal government planned for in the spring,” Bartlett told Global News.
Freeland was asked Tuesday whether the federal government had considered the impact of curbing immigration on the economy and the government’s fiscal anchors.
He did not directly respond to a question about maintaining fiscal anchors amid stagnant population growth, but defended the “pause” in the pace of immigration as helping Canadian infrastructure, such as housing, catch up. with the demand of newcomers.
“Population numbers had outpaced our infrastructure capacity to absorb new Canadians,” Freeland said. “Having that pause is really healthy for the economy.”
He argued that Canada should return to the demographic trends it experienced before the COVID-19 pandemic, when a brief disruption was followed by a burst of growth.
Bartlett warns that if the federal government wants to maintain its fiscal anchors and keep the deficit on the downward path it projected in the spring budget, it may need to remove additional tax mechanisms to generate more revenue.
That’s what the Liberals did with changes to the capital gains inclusion rate in the spring, a measure they positioned at the time as asking the wealthiest Canadians to pay more in the name of “generational justice.”
Bartlett says similar measures to improve “intergenerational equity” may be on the cards for a fall economic statement, but adds that the Liberals could be punished by the criticism that changes to the capital gains tax brought them from of some business and professional groups.
The Parliamentary Budget Officer also projected in a report last summer that changes to the capital gains tax would generate $2 billion less in revenue over five years than the Liberals expected in the 2024 budget. Fiscal control also said earlier this month that it projects the Liberals failed to keep the budget deficit below the promised $40 billion limit last year.
Meanwhile, the PBO will publish a new report on Wednesday on the impact achieving NATO spending targets could have on government finances.
Bartlett argues that any new measures announced in a fall economic statement could more closely resemble Ottawa’s plans to relax mortgage conditions and expand the availability of insured mortgages, proposals that have little or no fiscal impact.
“This would leave little or no room for additional new spending in FES 2024 without increasing additional tax revenue or abandoning any attempt to maintain fiscal sustainability. “As a result, this year’s FES could offer few advantages,” he wrote.
