• The federal government has announced a $59.5 billion spending package over the next five years to focus on clean economic transition, healthcare, and cost-of-living relief.
  • To finance these priorities, the government has promised to find $9.8 billion of savings within the public service and introduced several tax measures, which would increase revenues by $11.7 billion.
  • The government's fiscal decisions are supposed to be guided by its fiscal anchor, which is a declining debt-to-GDP ratio in the medium term.
  • However, given the uncertainty in the economic outlook, the projected deficit is at risk of growing if the promised savings aren’t found, and the economy slows more than expected.

The federal government announced $59.5 billion of new spending over the next five years as part of a narrowly focused budget that also promises to find savings in the public service and increase tax revenues.

Finance Minister Chrystia Freeland’s budget, tabled in the House of Commons, has three main focuses: the clean economic transition, health care and cost-of-living relief.

To finance these priorities, the Liberals are promising to find $9.8 billion of savings within the public service. They also are introducing a range of tax measures, including ones aimed at wealthier individuals and corporations, that together would increase revenues by $11.7 billion.

At a time of high inflation and a slowing economy, Freeland had promised fiscal restraint and reiterated that commitment Tuesday.

"Our country has a proud tradition of fiscal responsibility. That is a tradition we are determined to uphold," Freeland said in a speech in the House of Commons while presenting the budget.

The federal deficit is projected to decrease to $14 billion by 2027-28 from $43 billion, while the debt-to-GDP ratio is expected to rise slightly in the coming year before falling to 39.9 per cent in 2027-28, down from 42.4 per cent.

Desjardins’ chief economist Jimmy Jean said the budget shows the federal government is trying to "strike a balance" to not fuel the flames of inflation. The host of affordability measures, which includes an additional boost to the GST rebate, are considered to be relatively modest.

Federal budget 2023 includes $59.5 billion in new spending, looks to increase revenue. #CDNPoli #Budget2023

"But at the same time … you’re not seeing the deficit close by the end of the projection (period)," Jean said.

Canada's debt-to-GDP ratio is expected to rise in 2023-24 to 43.5 per cent, then decline to 39.9 per cent in 2027-28. The federal government’s fiscal decisions are supposed to be guided by its fiscal anchor, which is a declining debt-to-GDP ratio in the medium term.

Rebekah Young, director of fiscal and provincial economics at Scotiabank, said she didn't find the budget to be fiscally restrained. Given the uncertainty in the economic outlook, Young said the federal government could have limited spending to "the bare bones."

On affordability, Young said the measures don't addressing housing, which poses as a major cost-of-living challenge that's not going to go away when inflation eases, and that some of the money could have been better spent elsewhere.

"There are areas where they could use some of this funding to increase the supply of social housing or the public provision of actual housing," Young said, adding that this approach would have gone further than simply addressing short-term inflation pressures.

To alleviate the pressure of rising grocery prices, the federal government has extended the GST rebate boost offered in the fall. The rebate, which will go to lower income Canadians, will deliver up to $234 to a single person and up to $467 to a couple with two children.

As the Canadian economy slows, the fiscal and economic projections in the budget have been downgraded from the fall fiscal update to account for a shallow recession this year.

While the Liberals' budget presents a more restrained approach to finances, the projected deficit is at risk of growing if the promised savings aren’t found and the economy slows more than expected. A sharper downturn would mean less tax revenues to finance the government’s priorities.

Jean said the likelihood of a deeper recession has increased amid high interest rates.

"You've got to question what (the Liberals) are going do if there’s a recession that’s deeper than expected," Jean said.

The Bank of Canada has aggressively raised its key interest rate over the last year, bringing it to 4.5 per cent, the highest it’s been since 2007.

High interest rates are already slowing the economy, which posted zero growth in the fourth quarter.

The economic projections in the budget, which are based on a survey of private sector economists, suggest real GDP will grow by 0.3 per cent this year. The government’s downside scenario, which offers a more pessimistic outlook, estimates a contraction of 0.2 per cent.

As the economy slows, the budget projects the unemployment rate will peak at 6.3 per cent by the end of the year. The unemployment rate in February, the most recent month with available data, was five per cent.

The economic projection also finds inflation is expected to fall below three per cent in the third quarter before returning to the Bank of Canada’s two per cent target in 2024.

Jean said the budget also hinges on the federal government following through with public service cuts, an exercise that’s considered challenging. On the tax front, Jean said there’s questions regarding how much the federal government will successfully raise from high-income earners.

"Those are very sophisticated individuals that can find ways to reduce or optimize their taxes," Jean said.

This report by The Canadian Press was first published March 28, 2023.

Keep reading

Watch out for the household fallacy

The household fallacy describes the erroneous but commonly held idea that the federal government should operate its budget like that of a household which can run out of money. However, a household does not own a central bank which can create funding at will.

Ownership of the Bank of Canada allowed the monetarily sovereign government of Canada to sustain years of military spending such as WWII, to bail out big banks and corporations with hundreds of billions as it did after the financial crisis of 2008, and to engage in large-scale support to families and businesses as it did recently during the Covid pandemic.

Watch for the household fallacy in the ruminations of most pundits, politicians and even economists who claim that the government must restrain spending in order to save for rainy days ahead. Virtually all economic commentary today is based on ideas about the monetary system which are not merely confused but starkly and comprehensively counter-factual.


1. How the Bank of Canada Creates Money for the Federal Government: Operational and Legal Aspects
Penny Becklumb,Mathieu Frigon, Economics, Resources and International Affairs Division, Library of Parliament, 10 August 2015

"By recording new and equal amounts on the asset and liability sides of its balance sheet, the Bank of Canada creates money through a few keystrokes. The federal government can spend the newly created bank deposits in the Canadian economy if it wishes."


".....there is no external limit to the total amount of money that the Bank of Canada may create for the federal government."

"The Bank of Canada's money creation for the Government of Canada is an internal government process. This means that external factors, such as financial markets dysfunction, cannot cause the federal government to run out of money."

2. What is Modern Monetary Theory, or “MMT”?

The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.

Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual.

3. Alan Greenspan, former U.S. Federal Reserve Chairman

"...... monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies .......a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."

4. Fiscal prudes are fretting about the wrong issues

"The left, the right and people who should know better, like the PBO, are wrong because they cannot escape thinking of the federal government as if it were a household whose credit card was maxed out.


What they all seem to forget is that the federal government has the power to create new money. In fact, it effectively creates new money every time it spends."

5. William Mitchell is Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), University of Newcastle, NSW, Australia

"Forget the deficit. Forget the fiscal balance. Focus on what matters – employment, equity, environmental sustainability. And as we would soon see – the fiscal balance will just be whatever it is – a relatively uninteresting and irrelevant statistical artifact."

6. Pavlina R. Tcherneva, Assistant Professor, Franklin and Marshall College

Myth #1: The government should balance its books like a private household.


A government is the issuer of the currency. The household, on the other hand, is the user.

Government is constrained only by the inflation it can create by over-spending, but its ability to spend is numerically unlimited. Households are constrained by their ability to get dollars from some form income and from borrowing, and both of those have real limits.


"As the nation’s central bank, the Bank is the ultimate source of liquid funds to the Canadian financial system and has the power and operational ability to create Canadian-dollar liquidity in unlimited amounts at any time. "

8. Learn To Love Trillion-Dollar Deficits

"Politics aside, the only economic constraints currency-issuing states face are inflation and the availability of labor and other material resources in the real economy.


If any government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. So there are limits. However, the limits are not in our government’s ability to spend money or to sustain large deficits. What M.M.T. does is distinguish the real limits from wrongheaded, self-imposed constraints."