Federal Budget 2024: Which Came First? The Spending or the Taxing?

As expected in our federal Budget 2024 preview note, the Government of Canada plans to run larger deficits than anticipated in the Fall Economic Statement 2023 (FES 2023). Despite this, the federal government expects to meet its two deficit-related fiscal anchors: maintaining the 2023–24 deficit at or below the Budget 2023 projection of $40.1B and maintaining a declining deficit-to-GDP ratio in 2024–25 while keeping deficits below 1% of GDP in 2026–27 and future years.

Program spending increased by an eyebrow-raising $56.5B over five years in Budget 2024 relative to what was in the FES 2023. New measures were heavily tilted toward housing, but additional spending to address affordability, productivity, defense and the needs of Indigenous people also contributed to the tally. At the same time, public debt charges edged slightly higher, contributing further to budget deficits in this big spending budget.

On the revenue side, the improved economic outlook wasn’t enough to keep the deficit in line with the fiscal anchors laid out in the FES 2023. As a result, the federal government intends to raise taxes, largely by increasing the tax rate on capital gains realized by individuals annually above $250K (excluding principal residence and select other income) and corporations. More modest tax breaks for entrepreneurs and other measures provided a minor offset.

Taken together, the debt-to-GDP ratio is expected to gradually decline from its recent peak of 42.1% reached in the 2023–24 fiscal year to 39% by the end of the forecast. As a result, the federal government expects to meet the threshold for its third and final fiscal anchor: lowering the debt-to-GDP ratio in 2024–25 relative to the FES 2023, and keeping it on a declining track thereafter.

We’re skeptical that the federal government will be able to meet its fiscal anchors in the coming years. As a result of the Government of Canada’s plan to reduce the number of non-permanent residents allowed to work and study in Canada, the economic outlook has deteriorated after 2024 from the time when forecasters were last surveyed. As such, the downside economic forecast is increasingly likely starting in 2025. And given spending edges higher with each new fiscal plan, taxes will need to rise to offset additional spending and/or deficits will be larger.