Trudeau Government's Fiscal Anchors: Repeated Abandonment and Long-Term Implications

The Trudeau government has faced criticism for repeatedly abandoning its fiscal anchors, leading to high spending and debt levels. This article explores the factors contributing to the government's fiscal mismanagement and the potential long-term implications for Canada's economic sustainability.

The Trudeau government's fiscal anchors have been repeatedly abandoned, leading to higher spending and deficits. Projections consistently underestimated actual spending, with spending projections increasing by $319.8 billion over four years (2022-2026). Key factors contributing to this include underestimation of spending pressures, such as national pharmacare and demographic headwinds, and inaccurate projections, with spending estimates in the fall update being likely understatements.



The government's repeated abandonment of fiscal anchors raises concerns about long-term fiscal sustainability. To ensure economic growth and responsible spending, alternative anchors could be considered. One option is a 'rule of thumb' approach, such as limiting spending growth to the rate of nominal GDP growth. Another is a 'debt brake' mechanism, which automatically adjusts spending when debt levels exceed a certain threshold. A third option is a 'fiscal responsibility rule' that sets a maximum deficit-to-GDP ratio, which could be adjusted over time based on economic conditions.



The Trudeau government's fiscal anchors have evolved over time, reflecting changes in spending priorities and economic conditions. Initially, the government introduced a "guardrail" in 2020 to scale back post-COVID stimulative spending, tied to labour market outcomes. However, this anchor was quickly abandoned as the job market recovered faster than expected. In Budget 2022, the declining debt-to-GDP ratio was reintroduced as the fiscal anchor, but it has since gone up, not down, in 2022-2023 and is expected to do so again in 2023-2024.

The Trudeau government's propensity to spend more than it has in revenue has led to a rise in gross debt, which is now estimated to be $2.0 trillion for 2023/24, an increase of $721.6 billion since the pandemic began. Debt interest costs have also surged, reaching $46.5 billion for 2023/24, which represents more than 10 per cent of federal revenue. This high level of debt and interest costs limits the government's fiscal space to respond to economic downturns and crises, as it must prioritize debt repayment over other spending. Additionally, the government's repeated abandonment of fiscal anchors raises questions about its commitment to fiscal sustainability and its ability to effectively manage the economy during difficult times.

In conclusion, the Trudeau government's repeated abandonment of fiscal anchors has led to high spending and debt levels, raising concerns about long-term fiscal sustainability. To ensure economic growth and responsible spending, alternative anchors could be considered. The government must address the factors contributing to the discrepancies between projected and actual spending and maintain a consistent fiscal anchor to maintain public trust and support for government spending.