Even as the pandemic recedes as a health and economic threat, federal government spending remains at levels only reached at the peak of recent crises.
In late August, newly-appointed Treasury Board president Anita Anand instructed cabinet ministers to identify $15.4 billion in budget cuts over five years. Of that figure, just $500 million is targeted for this fiscal year, representing roughly 0.1 per cent of the federal budget.
Now well into their third term, the Liberals show no signs of making spending cuts that are comparable to those undertaken by their recent predecessors, even though much of the growth in spending was driven by pandemic-era additions to the civil service.
The result is a significant departure from a past “consensus” about the size of the state, says Sahir Khan, executive director at the Institute for Fiscal Studies and Democracy.
“The size of the state, relative to the size of the economy, stayed pretty constant from the end of the Chrétien-Martin government and all the way through the Harper years,” says Khan. Khan’s previous roles include assistant parliamentary budget officer and director of expenditure, management and oversight at the Treasury Board during the Harper government.
“When the Trudeau Liberals got in power, that kind of consensus changed. They were not focused as much on the level of fiscal restraint that previous governments had. The state did get bigger, and they unabashedly promised to do things in a different way.”
Program reviews
When Jean Chrétien was elected prime minister in 1993, Canada’s public debt was 100 per cent of GDP. The previous year, the credit rating agency S&P had downgraded Canada from AAA to AA+. The deficit in 1992-1993 was 5.4 per cent.
Chrétien and Finance Minister Paul Martin initiated the Program Review, an austerity program that reviewed every facet of government spending. Between 1994 and 1998, the government eliminated approximately 45,000 public service jobs — or 19 per cent of the federal workforce — and made significant cuts to healthcare, corporate subsidies and provincial transfer payments.
As a result, program spending fell from 16.4 to 12.3 per cent. By 1997-1998, the federal government ran a surplus.
From 1998 to 2015, under prime ministers Chrétien, Martin and Harper, total program spending remained relatively constant, in the range of 12 to 13 per cent of GDP.
Spending did surge in the wake of the 2008 financial crisis, but was brought back down to 12.8 per cent by the time Harper left office in 2015. Like the Chrétien Liberals, the Conservatives undertook a major program review, the Strategic Review and Deficit Reduction Action Plan, which saw cuts of approximately 26,000 public service jobs.
A spokesperson for the Treasury Board acknowledged that the Trudeau government’s current budget trimming exercise is qualitatively different from the exercises undertaken by the Chrétien and Harper governments.
“It is not about doing more with less, such as previous cost-cutting exercises like Program Review and the Deficit Reduction Action Plan,” spokesperson Joie Huynh told Canadian Affairs. “This is about ensuring that public servants and public funds are focused on the priorities that matter most.”
Some are not convinced.
“When you do these modest cuts exercises, departments will try to game the system a little bit,” says Khan. “You’ll offer up [programs] for which you have funding but not staff. You’ll offer up money that is lapsing, for which you have authority but you don’t think you’re going to spend.”
“The oldest trick in the book is for bureaucrats within departments to not find waste, but to come back with cuts that would outrage the public,” says Franco Terrazzano, federal director at the Canadian Taxpayers Federation, a citizens advocacy group.
Khan agrees, saying that during his time in government this practice was referred to as “offering up the snowbirds and the musical ride,” the latter a reference to the RCMP’s ceremonial band.
Khan would prefer a more holistic approach. “Without a fundamental program review, we don’t get a clear understanding of the performance of the base of spending and not just the increment that gets discussed every year around the federal budget.”
40 per cent increase
One of the drivers of spending growth under the Liberals is the expansion of the civil service. When the Conservatives left office in 2015, there were 257,000 federal public servants. Today, there are 357,000, a 40 per cent increase.
In April, the Parliamentary Budget Office published a report showing that federal spending on personnel over the past two years increased by 31 per cent, from $46 billion in 2019-20 to $61 billion in 2021-22, the most recent year for which final figures are available.
Departments that have seen significant growth include Elections Canada, Employment and Social Development Canada, Fisheries and Oceans Canada, and Public Services and Procurement Canada (PSPC).
Canada Revenue Agency’s headcount has grown by 47 per cent since 2015, a trend Canadian Affairs recently covered. Immigration, Citizenship and Refugees Canada has nearly doubled. Infrastructure Canada has almost quadrupled.
Canadian Affairs reached out to some of the government agencies that have seen the largest increases in their workforces since the Liberals took office.
PSPC and the CRA both said their double-digit staffing increases were due in large part to pandemic-related programs. The CRA said that administering stimulus programs like the Canada Emergency Response Benefit and the Canada Recovery Benefit required the agency to add staff.
The surge in spending during the pandemic was absolutely necessary, says Khan. “I would argue that it saved a lot of lives and probably bailed out the economy.”
“Governments need to do what they need to do to keep the economy and Canadians running,” says David Macdonald, senior economist at the think tank Canadian Centre for Policy Alternatives. “[P]rograms like CERB bailed the economy out. [Other] supports bailed out the business sector out… We [otherwise] would’ve seen a much steeper recession, much bigger increases in poverty rates.”
But while the Harper government cut back spending after the 2008 financial crisis, spending under the Liberal government has remained elevated.
Government expenditures peaked at 28 per cent of GDP in 2020-2021 and are now down to 16 per cent — a level roughly the same as the peaks in the 2008 financial crisis and the 1993 fiscal crisis.
Government data shows that only 17 out of 91 federal departments and agencies have decreased their headcount from 2022 to 2023, even though most pandemic-era supports ended in 2022.
By contrast, 72 agencies saw their headcount increase. The CRA alone added an additional 4,000 employees in the past year.
‘Austerity something of the past’
According to Khan, there were three main factors that contributed to the political environment that enabled Chrétien to make big cuts in 1994.
First, the country was facing a fiscal crisis. “Absent a fiscal crisis, it’s hard to cut. It’s hard for anyone to cut. People make a lot of noise about this stuff and the reality is when you get into office there are organizations and lobbies attached to every single program, it’s easier said than done,” he said.
Second, the Official Opposition to the Chrétien Liberals at the time was the Reform Party, a party that was in favour of reducing the size of government.
Third, Chrétien was governing with a majority. By contrast, the Liberals are a minority and are governing with the support of a confidence-and-supply agreement with the NDP, a party that supports a more expansive state.
By the time a government gets to its third term, it’s the execution — not just spending money on an issue — that really matters, says Khan. “As a government gets more mature, this discipline around how you spend and the result becomes far more important than just identifying a problem and allocating a sum of money.”
Will the Poilievre Conservatives, if elected, attempt to reign in the government’s program and overall spending? Probably not, says Matt Olsen, a government relations consultant at Jenni Byrne and Associates.
“I definitely think that austerity is something of the past,” Olsen said, citing the example of Ontario’s conservative premier, Doug Ford, who campaigned on reducing the size of the government but didn’t do so after getting elected.
“I think it’s evident that Conservatives are comfortable with big government as long as spending is targeted to things they support.”
Macdonald says there isn’t any “pressing” need to balance the books. “The deficit-to-GDP ratio isn’t at a particularly concerning level at this point. So there’s no need for immediate action, whether that be increasing taxes or cutting spending.”
He pointed to Japan’s debt-to-GDP ratio of 300 per cent, and noted Canada’s is in the range of 50 per cent.
“The question is how we use that debt,” Macdonald said. “In my mind that’s a more interesting question than what the absolute level is.”
For instance, “One of the big new programs in terms of spending is the $10 per day childcare program. That is a big new transfer from the federal government to the provincial governments. But it’s a useful new service.”
For Khan, the problem with spending remaining elevated is that it is becoming increasingly expensive to service debt. “The problem is, as interest rates stay up, that means that as they’re refinancing their debt, they will actually end up increasing debt service costs, that will keep eating into program spending.”
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