Ottawa’s changes to immigration flows are the latest in a slew of developments putting the governing Liberals — already in a politically precarious position with their minority government — under increasing fiscal pressure this fall, experts warn.
With a potential fall economic statement looming over a gridlocked House of Commons, some forecasters warn the Liberals may verge deeper into deficits in an update to the fiscal outlook.
Prime Minister Justin Trudeau and the Liberal Party are behind the opposition Conservative Party in the polls, and Trudeau himself has been the target of a revolt within his party as some members of caucus seek to have the leader step aside — calls he has so far resisted.
The House of Commons remains ensnared in procedural gridlock despite the Liberals surviving confidence votes last month, following the dissolution of the supply-and-confidence agreement with the NDP last month.
Normally, governments present a fall economic statement around November that updates their vision and any interim fiscal plans between budgets, but it’s not required by law and it’s not clear when one may come, if at all.
Darrell Bricker, global CEO of Ipsos Public Affairs, tells Global News that any economic statement that the Liberals present this year will be viewed through the lens of a minority Liberal government and a leader who are both struggling to gain any political traction.
The issue, he explains, is that the Conservatives are still traditionally seen as better stewards of the economy, while the Liberals fall into a more progressive camp that’s in touch with the social needs of the electorate.
“They’re usually seen as being compassionate, really interested in helping Canadians. But when it comes to managing the dollars that go into that, they’re not seen as particularly good at that,” Bricker says.
Chrystia Freeland, Canada’s deputy prime minister and the Liberal finance minister, has attempted to tell this story to voters as recently as Tuesday.
In her weekly economic update, she sought to criticize the “austerity” she says Conservatives would offer, where the Liberals see a need to “make investments in Canadians.”
Conservative Leader Pierre Poilievre has meanwhile made a slogan of axing taxes and policies he describes as focused on “common sense,” most recently saying on Monday that he’d scrap the GST on newly-built homes under $1 million if he became prime minister.
The right mix for governing is usually somewhere right in the middle between shrewd accounting and social support, Bricker notes. But on issues like affordability and housing — the top-of-mind issues for voters — he says the incumbent government is still falling behind.
“Liberals are on the wrong side of this in the sense that they’re not seen as managing money particularly well, but also not having the same priorities that Canadians have at the moment,” he says.
Bricker says that with the Bloc Quebecois pushing for hikes to Old Age Security as part of an ultimatum to continue supporting the minority Liberals, the government will be feeling the pressure to hike spending further in the months ahead.
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“They’re going to be under a lot of pressure and I don’t think Canadians should be surprised if they buckle to that pressure,” he says.
A very different economy
Concerns that the Liberals may not be the most deft hands at the wheel of Canada’s economy come despite positive developments on that front.
After peaking the 40-plus-year highs in 2022, inflation has recently cooled below the Bank of Canada’s two per cent target. And the central bank itself has lately picked up the pace of its rate cuts, delivering an oversized step of 50 basis points in its most recent decision.
While unemployment has risen, layoffs have been few and far between, and Canada’s economy has so far managed to avoid a recession.
But signs of a “soft landing” haven’t led to a resurgence in the polls for the Liberals.
“Governments tend to get punished when things get bad on these fronts. They tend not to get rewarded as much or as quickly when things do tend to improve,” Bricker points out.
And the latest economic winds do not all blow in the Liberals’ favour.
Randall Bartlett, senior director of Canadian economics at Desjardins, tells Global News that while lower interest rates are usually a boon for governments that eventually see lower costs on their debt, easing inflation actually means lower revenues for Ottawa in the near-term.
Falling interest rates and expectations for a modest rebound in Canadian economic output in the years ahead will bode well for Ottawa’s fiscal track record, he adds. But those boosts are not likely to prevent the Liberals from deepening the national deficits, he argues.
Bartlett authored a report published by Desjardins on Tuesday warning that the federal government’s spending commitments have largely ballooned since the last 2024 budget presented in April. The latest federal fiscal monitors also show deficits are tracking above what the Liberals last projected for the current and previous fiscal years.
Among the costs added to the bottom line is a pledge from the Liberals to meet the NATO defence spending targets of two per cent of GDP. That alone could be enough to add $10 billion to the federal deficit by 2028-29 and violate the Liberals’ fiscal anchors in the years ahead, Bartlett wrote.
Immigration cuts could deepen deficits
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 coming into the country, aiming to essentially freeze population growth for two years.
While such moves are aimed at easing pressure on the housing market and other government services, it also risks diminishing the tax base and could weigh on overall GDP.
“That slowing pace of real GDP growth is going to weigh on federal government revenues more than is going to save them in expenses. And ultimately that’s going to contribute to a higher deficit than the federal government planned back 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 on the government’s fiscal anchors.
She did not respond directly to a question about maintaining the fiscal anchors amid stagnating population growth, but defended the “pause” on the pace of immigration as helping Canadian infrastructure such as housing to catch up to demand from newcomers.
“Population numbers had gotten ahead of our infrastructure capacity to absorb new Canadians,” Freeland said. “Having that pause is actually really healthy for the economy.”
She argued that Canada ought to revert to the population trends it experienced before the COVID-19 pandemic, when a brief disruption was followed by an explosion of growth.
Bartlett warns that if the federal government wants to maintain its fiscal anchors and keep the deficit on the downward track it projected in the spring budget, it may need to pull out additional tax mechanisms to bring in more revenue.
That’s what the Liberals did with changes to the capital gains inclusion rate in the spring, a move they positioned at the time as asking the wealthiest Canadians to pay more in the name of “generational fairness.”
Bartlett says that similar moves to improve “intergenerational equity” may be in the cards for a fall economic statement, but he adds that the Liberals could be chastened by the flak the capital gains tax changes earned them from some business and professional groups.
The Parliamentary Budget Officer also projected in a report this past summer that the capital gains tax changes would bring in $2 billion less in revenues over five years than the Liberals expected in the 2024 budget. The fiscal watchdog also said earlier this month that it projects the Liberals failed to keep the budget deficit below a promised $40-billion cap last year.
The PBO is meanwhile set to release a new report Wednesday on the impact achieving the NATO spending targets might have on the government’s finances.
Bartlett argues that any new measures announced in a fall economic statement could be more akin to Ottawa’s plans to loosen mortgage conditions and expand the availability of insured mortgages — proposals that have little-to-no fiscal impact.
“This would leave little, if any, room for additional new spending in the FES 2024 without either raising additional tax revenues or abandoning any attempt at maintaining fiscal sustainability. As a result, there could be few goodies on offer in this year’s FES,” he wrote.
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