The Liberal government’s fall economic statement arrived in a cloud of controversy Monday after Chrystia Freeland’s abrupt resignation as the minister of finance.
The fall fiscal update will largely see the federal government look inward for growth opportunities as the spectre of United States president-elect Donald Trump’s protectionist policies loom large over the Canadian economy.
Within the 270-page fiscal update, the federal government offers an overview of risks to Canada’s economy tied to Trump’s return to office. Until he begins his second term in January, however, the specifics of how his policies including potential tariffs will impact Canada are unknown.
The Liberals eye domestic spending on artificial intelligence and opening the floodgates to more investments from Canadian pension funds as tactics to gird the economy against that uncertainty.
Freeland resigned from cabinet early Monday — doing so in a scathing letter to the prime minister that cited a difference of opinion on the direction of federal finances — leaving Karina Gould, leader of the government in the House of Commons, to table the document in the chamber.
The update on Ottawa’s finances ultimately presented a picture of economic uncertainty and a deteriorating fiscal position for Prime Minister Justin Trudeau’s Liberal government, already struggling in the polls and now beset by fresh political turmoil as well.
“It’s a big deficit, high-spending, high-debt fall economic statement,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
“It’s one where the federal government just seems to have lost control of the purse strings.”
Economic forecast ‘remains unclear’
The update confirmed speculation in Ottawa that the Liberals had blown past one of their fiscal guideposts from the 2024 federal budget: the deficit in the 2023-24 fiscal year ballooned to $61.9 billion, more than 50 per cent higher than the promised cap of $40.1 billion.
The federal government pointed to one-time costs incurred from phased out COVID-19 support and a $16.4-billion line item for “Indigenous contingent liabilities” as driving up the deficit last year. The latter refers to costs set aside for covering government costs related to land claims and other settlements with Indigenous groups.
Without these costs the deficit would have come in at $40.8 billion, according to the government.
The fall economic update stated that the fiscal anchor of a declining debt-to-GDP ratio would be maintained through the forecast horizon, though the projected path is somewhat higher than in the 2024 federal budget.
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That comes despite realizing stronger-than-anticipated GDP gains this year. The level of debt is much higher amid rising spending, Bartlett noted, putting upward pressure on the government’s fiscal anchor.
He told Global News that the Liberal government has “hung its hat” on having one of the best fiscal pictures in the G7. Signs of higher-than-expected deficits and higher debt-to-GDP ratios than first anticipated can eventually put the government’s oft-touted AAA credit rating at risk, he explained.
“All of these things add up to the risk that you could have a credit downgrade and ultimately pay higher interest rates, and that means Canadians pay higher interest rates as well,” Bartlett said.
The fall fiscal update proclaimed that Canada had achieved the coveted “soft landing” — bringing inflation back down to two per cent without tipping the economy into a recession — but came with sizable caveats for future growth.
While Canada has indeed avoided the technical definition of a recession, usually considered two consecutive quarters of negative growth in gross domestic product, real GDP per capita has been on a downward slide in six consecutive quarters.
Economic projections included in the fiscal update are based on surveys of private sector economists done in September. Those surveys were not updated after Trump secured re-election in November, according to the document, nor after his threat to levy blanket tariffs of 25 per cent on all goods entering the U.S. from Canada and Mexico.
“The potential impact of these developments on the economic outlook remains unclear,” the fiscal update read.
But with three possible economic scenarios presented in the document, Finance Canada noted that those geopolitical risks now have growth tilted towards the government’s weaker projections.
That downside scenario sees the Canadian economy take a hit of $42 billion per year, on average, compared to the baseline forecast.
In this outcome, weaker consumer and business confidence puts a “chill” on investment and Canada’s economy suffers as a result.
There’s also an upside scenario, where a stronger-than-expect U.S. economy also lifts growth north of the border.
Freeland’s departure casts a cloud
In her resignation letter, Freeland said that she and Trudeau were “at odds about the best path forward for Canada.”
She wrote to the prime minister to stress the importance of “eschewing costly political gimmicks” and “keeping our fiscal powder dry” in the face of tariff threats from Trump.
While Freeland’s name was largely stripped from the document, there was one reference to the work of the finance minister and deputy prime minister, two portfolios that she held before Monday. She would have been tapped to lead an “Invest in Canada” summit this spring, according to the document.
The resignation comes two days after the start of the federal government’s “tax holiday,” stripping the GST and HST off a number of grocery items and other common expenses for two months.
Plans to distribute $250 cheques to some 18.7 million working Canadians are currently in limbo, with the minority Liberal government unable to secure the support from another federal party to pass legislation for the direct relief. The cheques were not referenced in the fiscal update.
The fall economic statement includes $24.2 billion in new spending over five years, offset by $3.1 billion in new revenues and other savings.
Included in the fiscal update was a $15-billion fund for loans to finance the development of AI data centres in Canada. Ottawa will also explore using AI to improve service delivery within the public sector, according to the document.
In the face of Trump’s tariff threats and other geopolitical uncertainty, Ottawa is also looking inward to unlock capital and reduce barriers to trade between provinces.
The fall economic statement signalled that Ottawa will amend regulations to remove the 30 per cent rule for pensions investing in Canadian entities. The Liberals are also looking at removing a limit to how much pension funds could invest in public utilities, as well as ways for airports to better attract investment from Canada’s pensions.
The federal government announced it will extend the accelerated investment incentive to encourage businesses to invest in machinery and other technologies in Canada, at a cost of $17.4 billion over five years.
The Liberals said they are also planning to publish a list of all existing trade restrictions between provinces and territories and said the government is considering restrictions on intergovernmental transfers if those barriers aren’t removed.
Outside of the already announced tax holiday and changes to insured mortgages in Canada, which took effect on Sunday, there was little in the way of new affordability measures in the fall economic statement.
Among the few proposals was a plan to gauge market interest in making “long-term mortgage” options, like 30-year products seen in the U.S., more widely available in Canada.
