The 2025 Canadian federal budget has sparked intense debate among economists, policymakers, and the public. In a recent CHEK TV episode of her show, host Carole Taylor and renowned economist Jock Finlayson dissected the budget’s political and economic ramifications, offering a nuanced perspective on its ambitions, shortcomings, and the broader fiscal landscape. This blog post distills their expert insights, providing a comprehensive guide for listeners and readers seeking to understand the budget’s true impact and what it means for Canada’s future.
Full transcript (AI-generated):
Carole Taylor 00:00:22 I’m Carole Taylor on this edition of Journal, an in-depth look at the recent federal budget with one of Canada’s top economists, Jock Finlayson. You know, a lot has changed recently in how budget information is released. It used to be considered a major failure. If anything was leaked before the minister stood up in Parliament and officially read the document into the record. This, of course, was to prevent insiders from using information for their own benefit. In 1983, Mark Lalonde found himself in hot water because he had led a television crew into his office While the yet to be released budget lay right there on his desk. In 1989, Michael Wilson took responsibility when a leaked copy was handed to a reporter from a recycling plant. Michael didn’t resign, but this was recognized to be a serious misstep. Well not anymore. Now, rereleasing budget initiatives is regarded as performance art. In the weeks leading up to Budget Day in Parliament this year, minister after minister would discuss initiative after initiative that would be included housing. Oh, we’ve got something for that. Critical minerals. Oh, we’ve got that one covered. Prime Minister Carney even gave a speech promising the budget would be transformational, generational, whatever that means. So while politicos probably regarded all the early positive stories to be a successful maneuver, it kind of backfired when Budget Day. Headlines said over. Promised. Under delivered. Big day wasn’t quite as advertised. Carney’s budget misses the mark. So what should we really be talking about and taking away from the government’s financial blueprint 2025? Jock Finlayson has some warnings we should pay attention to. Back in a moment. So finally, after 500 days, we have a federal budget. And Jock, this budget has been called generational. And the only thing that I can say about generational is that, boy, we’re building up deficit and debts for the next generation to pay our kids and our, our grandkids. Because if you have a bill owing, somebody has to pay.
Jock Finlayson 00:02:50 Yeah, well, that much is true. And I’m a little puzzled that the at the expectations that were set by, by the Prime Minister and the Minister of Finance in the lead up to the budget. They sort of conveyed this view that this was going to be a transformational budget that would, you know, sort of fundamentally address the sort of structural challenges we have in Canada. And I think there’s some good things in the budget, but it falls far short, I think, of being transformational. And yes, the only generational aspect of it that’s worth noting is, is the additional debt that’s being built up very kind of rapidly, which will fall on the shoulders of future taxpayers. So there’s no way around that.
Carole Taylor 00:03:32 So at a high level, what’s your impression of the budget?
Jock Finlayson 00:03:35 Well, I’m not quite as critical of it as some of my colleagues. mainly because I think Mr. Carney inherited a big mess from from his predecessor. Not only was there a sizeable deficit that had been incurred, but, he inherited a federal government that has been, I think, Increasingly enfeebled in its ability to basically get anything done. Despite the enormous growth in the number of employees, 40% increase in the payroll of the Government of Canada under Mr. Trudeau, and more important than that is the state, the fundamental sort of stagnation of the Canadian economy.
Jock Finlayson 00:04:18 That is I mean, people talk about Mr. Trudeau having governed over a lost decade for the Canadian economy. Maybe that’s a little bit harsh, but if you look at productivity, our standing on global rankings of competitiveness, the growth of economic output per person, business innovation, our performance really has been very, very poor in all of these areas and has been for quite a few years. It’s not because of Covid. It started before the pandemic and it has persisted since. And that’s what Carney’s inherited is, to me, almost a stagnant kind of business that that he’s he’s become the proprietor of a big, very large one though that’s, you know, $3.4 trillion economy. And he’s got all these problems he has to deal with. And I think he does want and I think this budget in some ways signals that he does want to to change the direction. He wants to put more emphasis on investment, on getting projects done, on shrinking some of the operating costs of the federal government to free up money for defense, but also for capital spending.
Jock Finlayson 00:05:30 I think he’s serious. He understands we we’ve got to kick start business competitiveness, which has been languishing for really a whole decade here. and this budget begins to do that. But it’s kind of like turning a giant container ship that’s been adrift in the Pacific Ocean and doesn’t have enough fuel, you know, to fire it. He’s trying to kind of turn the ship in. This budget is the first effort to get there. Now, I do think he set the expectations too high. Paul Martin I always remember he used to say publicly and privately, and he probably the most successful finance minister in the history of the federal government. He used to say, you know, we want to under promise and overdeliver. And I think this budget does the opposite. So it’s kind of a that’s more of a political comment than an economic one. But I do think it’s true.
Carole Taylor 00:06:21 But also even with Paul Martin, their first shot with Chretien to get at the big problem was kind of mild at 94. Yeah, yeah.
Carole Taylor 00:06:31 And then the next one they said, okay, we’ve got to do this. And that’s when the hammer came down and I, I guess I was a little disappointed because the Prime Minister does know that this is a very difficult situation for Canada’s economy. I think he had the goodwill to really do some amazing things, but it’s sort of like nibbling around the edges a little bit.
Jock Finlayson 00:06:54 Yeah, I think that’s a very fair characterization. And you’re right to look back at the Chrétien Martin period. the first budget, they sort of made incremental change and then things, then the markets began. The equity markets, bond markets, currency markets began to get very, very jittery regarding Canada. And there was that famous editorial in the Wall Street Journal about the northern peso. And that fundamentally changed the landscape in Ottawa. And then you had the 95 budget. That was remarkable, really, and setting the stage for a tremendous kind of consolidation of the government’s finances that put us on a much, much healthier trajectory going forward.
Jock Finlayson 00:07:39 and we’re still actually feasting off that to some extent, because they brought under the Martin Chrétien era, and it continued under Mr. Harper. They brought the federal debt. And the the absolute numbers, I think, are meaningless to people. You know, billions, trillions. The federal debt was about two thirds the size of Canada’s whole economy in 1994. by the time Mr. Trudeau became prime minister, it was down to about 30% by the time he was succeeded by Mark Carney. It was up to 41 or 42% of the economy, and it will kind of remain in that range, according to the budget projections. So we’ve seen a substantial growth in the government debt burden since Mr. Trudeau took office. But we’re not back to the sort of catastrophic levels of debt that became almost unmanageable, I think, in the early years of Mr. Chrétien and Finance Minister Martin. So we’re not there yet and we’re not going to see a. I don’t think we’re going to see a financial market reaction that forces a fundamental change in fiscal policy in Ottawa.
Jock Finlayson 00:08:45 Indeed, bond yields have been very well behaved since the budget was brought down. So there really isn’t any evidence of that.
Carole Taylor 00:08:50 So looking at the bond market, you’re feeling reassured. Are you?
Jock Finlayson 00:08:55 Well, I think I think the bond markets first of all. You know, there’s the old phrase that I’m wearing, one of, you know, the cleanest of my dirty shirts. And that is kind of what fiscal policy is like for a lot of the advanced economies these days. There’s the US, which is in total disarray when it comes to fiscal policy. One of the few things the two parties agree on in Washington, DC, is they don’t want to deal with it, right. and the Americans have the world’s reserve currency. They have running room. They can keep borrowing like mad until they can’t, but we haven’t quite got there yet. Britain is in a terrible state. it makes Canada look good economically. and its fiscal position is really very, very challenging. France. similarly, the French government is now paying higher yields on its debt or forced to pay higher yields than Italy, which is the first time, and Greece.
Jock Finlayson 00:09:53 So I mean, that tells you what the market is thinking of France. We’re not you know, we’ve had some decline, but we’re not in the same boat as those jurisdictions.
Carole Taylor 00:10:01 So, sure, I feel that comfortable saying, oh, well, we’re better than the lot who are really in a mess.
Jock Finlayson 00:10:07 But it shapes the way the markets view the fix. The fixed income markets are the most important public markets in the world, but way more important than the equity markets, because the amount they trade is vastly greater. Currency markets are also much, much larger in absolute size. So, you know, if you if you run, if you lose the confidence of investors in the fixed income market, you, you like Argentina has done just in the last year for about the 20th time in their history, you suddenly hit a wall. And we almost got there in 1994 and 95, but we’re not there. I guess what I’m saying is we’re not there today. I don’t expect to see some people talk like we’re the government is is is going to be unable to borrow, I in in the next year or two.
Jock Finlayson 00:10:53 I frankly don’t see that.
Carole Taylor 00:10:54 But it is interesting that Fitch has come out all of a sudden being quite negative about the Canadian budget in particular, and we haven’t heard from all of the other rating agencies, but I used to watch them so closely because it affects how much you have to pay to borrow.
Jock Finlayson 00:11:13 It does, and they’re a bit of a lagging indicator because there I, I like I look at the bond markets, the behaviour of fixed income investors. I think because the rating agencies come along after you’ve already seen shifts in sentiment in the market rather than. So there in some ways the work they do is almost useless in my view. But it’s important. It’s important as part of the sort of competence basket, I guess, for any jurisdiction. but I think, I mean, Canada is one of the few triple rate Triple-A rated sovereigns in the world. I mean, we’re higher than the United States, for example.
Carole Taylor 00:11:51 and, you know, could we.
Jock Finlayson 00:11:53 Well, no, I could see because of how, you know, we’ve been a stellar credit for quite some time.
Jock Finlayson 00:12:01 Do I think we might see one downgrade? Yes. That would not surprise me.
Carole Taylor 00:12:05 We’re going to take a quick break here and then continue looking at some of the specifics out of the budget. Back in a moment. Talking to Jack Finlayson about the recent budget and trying to figure out some of the details. I have to tell you, there are a few things that have bothered me and the accounting changes. All of a sudden we’ve this we’ve got capital and operating, which is how you usually have it, except he’s put more things over into the capital section. That makes our deficit not quite as bad as it might be.
Jock Finlayson 00:12:41 Yeah. and although I think there’s a principled justification for dividing operating spending from capital spending, that’s not the way the Government of Canada has kept their books until now. So understandably, people are a bit skeptical when this change is announced. Sort of conveniently timed to arrive with a new a new prime minister. And they, they, they were saying we’re going to cut operating spending or the growth of operating spending, but we’re going to borrow quite a bit for capital, which means the total, you know, deficit is going to keep is going to stay at a fairly high level.
Jock Finlayson 00:13:21 I, I would look through I look through that. I don’t pay a lot of attention to it. Frankly. I don’t think it’s that salient. What matters is how much are they borrowing? What’s the size of the deficit in relation to the Canadian economy? And how much are they spending to service the debt relative to the revenue inflows, which are those are the fundamental indicators.
Carole Taylor 00:13:42 And I gather it’s a very significant large number already. The interest payments.
Jock Finlayson 00:13:46 It is, it is. I mean, they’re spending more. In fact the change. According to the projections, the change, the increase in interest costs between this year and the end of the decade will be more than the total quantum of interest costs in 2020. Now, we went through the Covid pandemic, which had the effect of driving up the debt very dramatically. So it’s a little bit of an unfair comparison. But yes, they’re spending more on interest. and that’s going to become a feature of the federal budget that’s going to limit flexibility going forward.
Jock Finlayson 00:14:22 And there’s no way around it. You know, people a lot of people I remember Chrystia Freeland, the former finance minister under Mr. Trudeau, her her first budget in 2021. I remember vividly listening to it and she said interest rates are so low, the cost of money is so low, we can’t afford not to borrow heavily in order to invest in the future of Canadians. That narrative is gone now because we’re paying higher interest costs, as are other jurisdictions, and we’re not going to go back to free money. so yeah, yeah, interest payments are going up. Debt is going up. as a share of the economy slowly. But it is.
Carole Taylor 00:15:02 The deficit is double what Trudeau left. Right.
Jock Finlayson 00:15:05 Yes. The fall economic statement, was looking for about a $40 billion deficit. And this is, you know, roughly 80 billion. and that that’s not all because of decisions that Mr. Carney has made. It includes, as well, the effects of a weaker economy, which, you know, reduces revenues.
Jock Finlayson 00:15:25 And importantly, it includes the initial down payment for the commitments we’ve made on defense spending. And this should not be overlooked in the discussion of the of the Government of Canada’s kind of financial plan. We are ramping up defense spending on a scale never seen outside of a war scenario, from 1.4% of our economy, it’s already gone to 2%. As a result of the commitments Carney made earlier in the year.
Carole Taylor 00:15:51 Now we’re talking.
Jock Finlayson 00:15:52 Five, and now they’re talking three and a half on a percent of GDP on core defense and another 1.5 on related kind of things by 2035. So that is going to represent a very large additional burden on the overall federal fiscal position. And we have, you know, the commitments been made. I think there’s a lot of support for it. We have to pay for it either through higher taxes, more debt or cutting spending elsewhere. I don’t think they’ve quite got their heads around that yet. but, you know, Canadians should recognize those commitments will not come cheap.
Carole Taylor 00:16:24 So when you step back and you’ve talked about the weakness in the Canadian economy, do you see this budget as a growth budget? Is it going to deal with things like productivity? Is it going to deal with things like GDP per capita? Is it going to really lift the economy?
Jock Finlayson 00:16:42 I think that is and I’m reading, I’m obviously Inferring because I don’t, I don’t know, but I do think that’s where the Prime Minister wants wants to go.
Jock Finlayson 00:16:52 He wants to focus more on what I would call the supply side of the Canadian economy, which is how productive we are. What’s the capital stock? are we able to grow economic output faster than our population? Do we have enough investment? Do we have innovation? Are we productive? All questions that Mr. Trudeau, I think, was supremely disinterested in.
Carole Taylor 00:17:11 And so does this budget do it?
Jock Finlayson 00:17:12 It’s a down payment. It’s a it’s a down payment in moving the ship of state is the way. The way I see it moving, moving this gigantic, you know, container ship that’s been adrift in the ocean with no real direction. And a captain who’s asleep. He he is, I think, trying to move it now. Was it. Is it enough? No. I did expect more, on, on particularly around the productivity agenda and more to attract business investment where we’re really struggling in Canada. I think Carney made. Mr. Carney may be hoping that because of his own personal credibility with C-suite executives, global investors, capital markets, and he does have credibility in a way that, you know, one doesn’t normally see of a Canadian political leader, that he can kind of move incrementally and set a direction, and people will have confidence and companies will start investing in Canada again.
Jock Finlayson 00:18:10 And that’s that’s a bet I think he’s making. And, you know, time will tell whether whether it’s it’s it’s a sound bet. I’m not convinced. But I do believe that’s that’s his strategy.
Carole Taylor 00:18:21 So there’s another ship that’s, out there and that’s the B.C. budget sinking. Sinking?
Jock Finlayson 00:18:28 Yes. Well, bc I mean, the federal government has been, I think, poorly managed from a fiscal policy point of view throughout the entire tenure of Mr. Trudeau. Remember when he came to power, he had this famous phrase, he first of all, he ran on a platform and said, we’re going to run deficits like proudly. And secondly, I remember this phrase he used the deficit will will take care of itself, which I never quite understood. BC is a different situation bc we had governments, the government you were part of under Premier Campbell, his successor Christy Clark, the Liberal government, and then the John Horgan, a government, I would say all three of those somewhat different personalities, a different political stripe in the case of Mr. Horgan, were good fiscal managers of the province.
Jock Finlayson 00:19:21 We had budget surpluses some years. We had if we had deficits, they were small. We had government debt shrinking as a share of the the B.C. economy. Evie has blown all of that up. And in three short years as premier, he has dug us into an incredibly deep hole. Why he’s done it or how one can justify it. I really, I really can’t answer. But we are in a real mess. We’ve had 2 or 3 credit rating downgrades under Evie, and there’s more coming. And, I’m really I’m much more worried about the BC fiscal situation than I am about the federal one, because we’re a province rather than a country. We don’t have our own currency. And we had a good record, and it’s been eviscerated under under this premier. So I think we are really in trouble here. And the economic backdrop isn’t very promising on top of that. So I don’t see where this government’s got a credible strategy to either grow the economy, which is important from a fiscal management perspective, or deal with this gigantic deficit that’s opened up, which is not, you know, funded.
Jock Finlayson 00:20:29 It’s basically it’s gone from balance. I mean, we’ve inherited a surplus. Now we have roughly a $15 billion deficit. And they their political narrative is they blame it on Trump. This all happened. 90% of this happened before Donald Trump returned to the white House. So he’s made it worse. Yes, but he is not the cause of BC’s fiscal mismanagement. The people sitting around the cabinet table in Victoria, they are the cause.
Carole Taylor 00:20:52 And there’s another little bomb sitting there because in their financial update, they brought forward all of the the revenue that was coming from the tobacco companies that will be paid over many, many years and talked about as if it’s revenue coming in this year.
Jock Finlayson 00:21:08 Yeah.
Carole Taylor 00:21:08 Which means next year, nothing.
Jock Finlayson 00:21:10 Yeah. So what they did is they took a $2.8 billion tobacco settlement, which I think previous governments would have booked over time because it was meant to cover 18 years. and they, for their own reasons, decided to book all that revenue in this fiscal year. So that revenue helps us this year and it’s gone next year, which means the deficit will be higher.
Jock Finlayson 00:21:33 We’ve just had a collective agreement inked with the largest public sector union that will become the template across the provincial public sector. That’s going to have some implications for government spending. And the list goes on.
Carole Taylor 00:21:45 As I sure remember. Boy, those wage costs when you have to deal with them at the end of the year like they’re building forever. They’re not a one off.
Jock Finlayson 00:21:53 It is the platform.
Carole Taylor 00:21:55 So thank you Jack. I always enjoy talking to you and appreciate your comments about the budget. We’ll be back in just a second. We all know what living on borrowed time means, but both Canada and British Columbia are now living on borrowed money. A lot of it. In this year alone, British Columbia has announced a deficit of at least $11.6 billion, while Canada, in the recently released budget predicts the country will be $78.3 billion in the whole. Let me know your thoughts on YouTube. Until next time, I’m Carole Taylor.
