Budget 2023: Will the Government Stay the Course on Deficit Reduction?

On March 28th, Deputy Prime Minister and Finance Minister Chrystia Freeland will table Budget 2023 in the House of Commons. As with any budget, it will provide an assessment of the standing of the nation’s finances, the economic condition of the country, and the fiscal plan to finance the government’s policies. However, this budget will also reveal whether the government will stay on deficit reduction or prioritize initiatives such as healthcare, green subsidies, support for vulnerable people, defense spending, and Ukraine.

The State of Public Finances

Since taking the Finance reins in 2020, Freeland has successfully steered public finances toward normalcy. As a result, the federal budgetary deficit has been reduced from a COVID-related record high of $328 billion in 2020-21 (14.9 percent of GDP) to an estimated $36 billion in 2022-23 (1.3 percent of GDP). While this is a significant decline, it remains to be seen if the government can deliver on its 2022 Fall Economic Statement fiscal update to move gradually towards a balanced budget over the next three to four years.

Policy Priorities and Trade-offs

Maintaining modest planned budgetary deficits will provide the government with the fiscal room to fund priority initiatives. Still, fiscal consolidation will help rebuild fiscal buffers for the next crisis and support the Bank of Canada’s commitment to reduce the inflation rate to the 2 percent range over the next year. Resources are constrained, especially with high inflation and high public debt. Given potential downside risks from monetary policy tightening and the Russian invasion of Ukraine, a cautious fiscal strategy would favor a slimmer budget. Freeland has already telegraphed that this budget will land in a context of “fiscal restraint” and “challenging choices,” hinting at difficult trade-offs.

Debating Strategy and Priorities

Under Westminster parliamentary traditions, budgets play an important and pivotal role in the financial cycle. They link consultation with citizens and stakeholders on policy issues to the legislation and audit phases of the cycle. Therefore, we need a good budget debate on strategy, priorities, and policies to address short-term instability risks and long-term transition challenges.

Partisan debate is expected since budgets are inherently political documents, but compromising and working together across political parties is necessary to steer the best policy path ahead. Trust and confidence in our institutions are also crucial, especially now, when the Canadian economy is slowing down due to significant monetary tightening over the past year. Whether there will be a soft landing (weak growth) or a hard landing (a recession) remains an open question and a planning challenge for this budget.

Related Facts

• The federal debt as a percentage of GDP went from 31 percent to 48 percent in one year due to the COVID public health crisis and related fiscal supports.
• A cautious fiscal strategy would favor a slimmer budget due to potential downside risks from monetary policy tightening and the Russian invasion of Ukraine.
• Good ideas from across political parties can enhance the chances of steering the best policy path ahead.

Key Takeaway

Budget 2023 will tell us what policy path the government is on. Maintaining modest planned budgetary deficits will provide more fiscal room to fund priority initiatives. In contrast, fiscal consolidation will help rebuild fiscal buffers for the next crisis and support the Bank of Canada’s commitment to reducing inflation. Now is the time to build trust and confidence in our institutions, work together across political parties, and confront challenging trade-offs to steer the best policy path ahead.

Conclusion

The Canadian economy is at an inflection point as the government prepares to table Budget 2023. Will the government stay the course on deficit reduction or prioritize other initiatives? Debates on strategy, priorities, and policies are needed to address short-term instability risks and long-term transition challenges. Compromise and collaboration are necessary to steer the best policy path forward. The stakes are high, and the next few weeks will clarify what to expect for the coming years.