Spend Big, Cut Deep: Understanding Canada’s 2025 Federal Budget

Speaker A: Foreign.

Speaker B: Welcome back everyone. My name is Jeremy Cote and you're listening to ionas. On, uh, November 4, Finance Minister Francois Philippe Champagne tabled Canada's 2025 federal budget, a plan that promises to spend big and cut deep. With nearly $150 billion in new investment and a projected $78 billion deficit, this budget aims to fuel growth through infrastructure and defense spending, while trimming down on government operations costs by 10%. It's a mix of ambition and austerity, designed to balance long term investments with short term discipline. But will it deliver? To discuss this unprecedented budget, I am joined by my Ionasc friend Ben Dupe and by Rebecca Young, the head of Inclusion and Resilient Economics at Scotiabank.

Speaker C: Rebecca joined Scotiabank in 2019 as a director for Fiscal and Provincial economics while also covering local auto sector. Previously she held roles in the imf, the Department of Finance, and the World Business Council for Sustainable Development. She holds a BA in Chemical Engineering from McGill University, a Master's in Environmental Policy from the London School of economics, and an MBA from Insight.

Speaker B: Spend big, cut deep. Understanding Canada's 2025 federal budget, an episode produced by Jeremy Cote and Ben Dupe, with the special collaboration of Rebecca Young and edited by Christina Wu. Rebecca, thank you very much for joining us today.

Speaker A: Thank you for inviting me.

Speaker B: Pleasure to have you. So much of the attention has gone to the scale of new investment. Nearly $150 billion in new gross spending, creating a massive $78 billion deficit in our public finance. Rebecca, our first question for you today is does Canada have the fiscal capacity to borrow so much money? And is Canada at risk of seeing its credit score downgraded in the short run?

Speaker A: I think that's a great question and I want to backtrack. So I was in budget lockup on November 4th and got this 400 plus page document. And so you very quickly have to ask and answer that exact question within a couple of hours of digesting it. And it was, you know, there have been quite a few unusual, if not very big budgets over the past five or six years. This one was unusual in the sense that there was so much hype and talk about triple digit deficit figures and, you know, lots of adjectives like transformational. And I know we'll get to whether it wasn't transformational, but there's a lot of hype going into the budget. So when, you know, folks like myself opened IT and saw 78 billion, it was like, oh, that's what we kind of thought it would be, but we thought there was more risk that it would be bigger and potentially way bigger. So there was this bit of a sentiment of like, oh, you know, that's it. Um, but back to your question of, you know, can Canada afford a deficit like 78 billion this year? And then obviously a tale of deficits over the horizon you really have to unpack. Um, you know, I think there's a misconception around fiscal policy. Sometimes people too easily look at just the deficit, um, and they say, you know, is it or isn't it um, you know, affordable or sustainable? And the first question, you know, as economists we have to ask, um, is first, does the economy need it? So you have to look at kind of where we are in the cycle, the economic cycle, and whether stimulus is needed or not, whether fiscal policy is needed. The second question then, uh, before you get to what do you do? Is, um, do you have the space? Is it sustainable if there's a gap to fill it? And then the third question is how do you use fiscal policy? So to your point, and I'll touch on the first two and leave the last for discussion, but the first one, clearly the Canadian economy is very weak. And we heard um, Governor Micklem indicate that, you know, as a result of tariff wars and uncertainty, uh, that Canadian GDP is much weaker than it would be otherwise. And we're running somewhere around a 1% annualized pace of real GDP growth. That's about half of what used to be our growth potential. So clearly a lot of headwinds and you know, what we had heard from the governor and then subsequently the finance Minister and the Prime Minister is about half of that weakness is demand because of cyclical and geopolitical uncertainties. But half of it is permanent. And I would say pretty resoundingly check the box that the Canadian needs, Canadian economy needs some form of fiscal stimulus. The second question then, do we have the space? And that's where, um, without getting into um, too much detail right now, I would say that overall Canada's um, um, general government debt levels are pretty mediocre, if not very good. So if you look at, if you roll up kind of provincial, municipal and federal into a general government, uh, fiscal balance, we actually look um, middle of the pack across um, OECD or G7 peers. When you net out our financial assets and a big chunk of that, um, well funded pension plans, we actually have relatively quite low, um, ah, net debt. And the other distinction that I would say, particularly outside of our own borders, that's less appreciated, including by some rating agencies, is this underappreciation of Just how decentralized Canada is, and there are very few countries. I think Belgium's the only other country that even comes close to Canada in terms of how much revenue and expenditure authority is devolved. So about half of Canada's debt sits on, not on the federal balance sheet, but on provincial, municipal. And they're facing lots of pressures in terms of kind of aging demographics and healthcare and education. You know, the list is pretty long. So you really can't judge federal fiscal policy in isolation. That, you know, we do need to look at that general government debt level. And are there things that the federal government is doing to, you know, kind of relieve some of the pressures on provinces? It's a long story. I would say the economy needs it. Um, and, you know, we, we can afford it. In fact, I would say we need to be asking the question, you know, looking at it not just of what will it cost us to spend or invest, but also what would it cost us not to invest? Because the headwinds that we're facing are not typical cyclical that we're going to get back to where we were when the economy was at full speed. I think nobody any longer believes that, and that if we just kind of sit and do nothing, not bend or invest, that we would be on a permanently lower growth trajectory.

Speaker B: Yeah.

Speaker C: And then just piggybacking on kind of your sentiment of stimulus. In the lead up to the budget, the government has highlighted the importance of infrastructure and defense investments. Uh, how significant are the spending increases in these two industries for the budget?

Speaker A: Well, those were certainly the two biggest in terms of the incremental, um, uh, fiscal amounts that were added on. And I would say, you know, so there's so many tables in the budget right now, and I know we'll get to the new capital and operating, but that was another kind of overwhelming moment when you kind of split open the, you know, the spine of the budget is like, which numbers do you focus on? Because then they also talked about, you know, ambitions of trillion dollars and, you know, how much private versus public capital they were leveraging. So a lot of numbers, um, in the budget, and then on top of that was trying to tease out how much was new on November 4th versus what did we know already? And I think that's another area where there were some, you know, some people happy, some people unhappy, depending on whether you think we're spending too much or too little, is that there actually wasn't a whole lot incremental that we didn't already know about. And so, you know, since this um, government, you know, since the Carney government has taken power, they've, you know, kind of very consistently very, you know, rapidly rolled out, um, you know, different policy measures, many with fiscal implications, you know, starting with the July 1st personal income tax measures. So a lot of it we already knew was coming and it had been announced, if not weeks, months ahead. So we open it. Not a whole lot new, I would say, um, on the defense and, uh, infrastructure side, we know that they kind of leaked, uh, a major infrastructure package of which the vast majority was reprofiling or re. Existing funds that had been kind of like fragmented, that they were rolling up into a more coherent, uh, transfer to provinces and municipalities. So that was a, Ah, you know, not as big once you netted out what was already existing. But there was, you know, incremental new funding there. And then the defense stuff was also, um, you know, even bigger in terms of the incremental, um, outlay. And so we saw, um, uh, you know, that that was a big spending number. Now on military, I think, you know, most folks would be left, you know, anybody following military would be left with a little bit of a, you know, I need more information on what they're going to do because, um, you know, it's very difficult to. You have to make a lot of assumptions in terms of, you know, how much is going to capital expenditure, how much is going to wage and salary. We saw in this budget that a bunch of it was going to wage and salary, um, you know, less so to uh, some of their capital expenditure plans. Um, and so, you know, my best guess is, you know, this new profile takes us somewhere a bit higher than the 2% per GDP, um, um, old NATO target that they'd committed to prior. And they said, we'll get right there, but not quite on the path of the 3.5 and 5% NATO target. But they, you know, they said they're going to come back with a, you know, a strategy, um, you know, and a framework around military and. And kind of related military expenditure plans. But they didn't quite have that budget day ready. So, you know. Yes, Barry, you know, those were m M. The signature. Two of the signature items in the budget, but, um, you know, not a lot of detail. And you know, I think that we'll hear more down the road.

Speaker B: Right. No, you brought up some, uh, very interesting points. Ah, the federal, uh, government kind of proceeding with a, uh, budget striptease throughout the year, if I can use. Um, but you also mentioned the increase in, uh, substantial increase in military spending and it actually brings me to my next question. Uh, do you see this investment strategy kind of supporting long term economic growth? Uh, particularly you know, given the slower economic outlook that you mentioned that the bank of Canada has been uh, kind of pointing out at will those like military investment or infrastructure really like, support long term growth?

Speaker A: That's a really good question. And I think that you know, you'll see lots of folks calling this a supply side budget. And that is, you know, the idea that they're not juicing the near term kind of consumption driven side of the economy. Rather they're focused on how do we enhance the productive side or the supply side of the Canadian economy so that we can produce more without kind of triggering uh, inflationary pressures. And that's conditional on also having more demand for the stuff that we produce both within our own geographic boundaries and with trading partners new and old. So overall it does fit the bill uh, of when you look at the new spending that was announced in this budget incremental, the vast majority was what we would classify as supply side that we didn't see really any very, very small, um, uh, new measures, kind of token measures that were more on the demand side. And I would say in part that they had announced um, targeted tariff relief for sectors and households hardest hit, including changes to EI programs, for example and reskilling programs and also then loan financing for industries that wanted to pivot away from uh, a trade exp, uh relationship with the U.S. so you know, so we knew a bunch of that kind of near term demand stuff, you know, was, was well targeted and I think that was appropriate because what's also different about you know, the Canadian economy right now in you know, we're not arguably facing as much of a generalized shock as we would in a kind uh, of a slow, you know, a typical slowdown because really the you know, we, we do have one of the lowest tariff rates right now of you know, the trading partners with the US of you know, very roughly 5% effective um, tariff rate. But it's really concentrated in sort of aluminum and steel and you know, copper and lumber. Um, so you know, the, you know, the businesses that are working in those sectors and the households that you know, are working in those sectors, um, the communities that are kind of relying on the, you know, the indirect benefits of those sectors are really, and have really been feeling the pain and the rest of the country's been, and feeling it through uncertainty channels and through commodity price channels and so forth. But we really have sort of parts of the economy and Canadian Society that are acutely hurting right now and then other parts that are fearful of, you know, where is it going. So I think that, you know, the idea of, you know, being very focused on like not doing too much in the near term demand side right now, but really focusing on supply. Because in theory, you know, focusing on supply should be beneficial for the Canadian economy over the long run. Whether or not we're in uh, a sharp sharper or less sharp downturn in the next six to 12 months.

Speaker C: Yeah, for sure. And then kind of moving on to the uh, a more specific part of the productivity, um, is labor composition. Um, would you say that Canada currently has the correct composition of high skilled to low skilled workers, um, to kind of compete and fuel this investment growth? Particularly looking at the construction industry, do we have the current labor skills needed to fill all this investment?

Speaker A: Well, that's a great question. And I would say, you know, at face value, um, you know, if we get to the ambitions of where this government wants to go with investment is that, you know, keep in mind, you know, manufacturing, commodities, commodity extraction, housing and infrastructure, all of these, um, objectives are relying on uh, a pretty small subset of the labor force. And so if things don't change, that is ah, going to be a very real bottleneck. And so I think that um, we do need to keep our eye on the ball in terms of, um, to make sure that's not a bottleneck because it can be counterproductive if we see that competition and wage pressures, um, if you can, you know, the right labor at the right time, that can also then add more time, which time is money. And so if we see the cost of doing, you know, all this stuff is higher than, you know, government has anticipated, that, you know, that, that is, you know, that is a negative overall for what they're trying to achieve or it kind of, kind of pulls out some of the steam. But I would say, um, you know, maybe the more, you know, it does reinforce a couple of things that are within, you know, you know, the economy's control. I hate to say federal because it is going to require collaboration, you know, collaboration across layers of government, collaboration with, you know, public and private sector. Um, but one is, you know, part of um, you know, right now we do have, you know, very roughly 3 million temporary workers in the country. And we know, you know, part of the budget was around the new immigration plan and you know, we're talking fiscal today. But indirectly immigration and population growth impacts the economy and growth. But we do need to start thinking more generally about kind of Human potential. And so a lot of the budget was about, you know, investing in capital, investing in machinery, equipment, IP and so forth. And we need to go there. But we also can't forget, you know, investing in people. And so, you know, one of the most obvious ones is that we do have 3 million people, not to mention all the recent immigrants. And when we look at data of newcomers to Canada, it takes, you know, five, you know, about five years, give or take before they're getting up to kind of full economic, economic potential. And some categories of, um, of newcomers, you know, never really meet that same potential as the natural born Canadians. So I think that's an opportunity to really think about how do you kind of juice up the investment in, you know, in people that, you know, may not be um, living up to their own potential. And I think that's not to be ah, pejorative because you know, it is in, you know, their house, you know, wages and income. I think that's something that no benefits those households, but also the Canadian economy. So that would be one thing. I think we also need businesses investing in people more generally, not just in newcomers because um, you know, industry, industry competition composition is evolving and there is generally a, you know, a degree of churn. So we need to figure out how to be investing kind of in, in people at the same time keeping markets flexible. So we don't want to kind of reduce that labor reallocation that, you know, that happens naturally. But I do think we, you know, we, we need to, to be thinking about that and you know, layering on another kind of complexity is the whole, you know, AI movement that's going on too. And there's a question, you know, as to what skill sets do we or don't we need and is it going to lead to job losses through automation or is it going to be augmentation? And you know, a lot of that is going to be policy determined and determined by how much we invest in people. So you know, overall say yes, you know, shortages in labor if we don't do anything in those concentrated, you know, skill sets. Um, but there's a whole lot that I think we can do, um, that would not only, you know, maximize the capital investment plan, but also, you know, overall benefit both, you know, the broader GDP growth and the welfare of Canadian households. Right.

Speaker B: No, really interesting. Um, you mentioned the importance of investing in people and making sure they have the right training. Um, I see time going by and I do want to move on to kind of the next section or interview today. Uh, me and Ben wanted to talk about the fiscal discipline and austerity that this budget is also kind of bringing it on. Um, so the government is committed to large scale operational cuts. Uh, the budget outlines about $60 billion in savings and a, ah, 10% reduction in the federal workforce. Some experts have, ah, compared this to the move in the 2000 and tens when the Harper government cut a lot of the federal workforce, uh, and it also faced significant opposition. I'm specifically thinking in the maritime, uh, provinces. A lot of people were affected.

Speaker A: Um,

Speaker B: so my question for you I guess is, ah, how significant are these measures in the grand scheme of the fiscal plan?

Speaker A: Um, you know, another great question, and you know, this wasn't in my bio, but I was actually in the federal government in the Finance Department during those um, Harper cuts. You know, we called it the drop, the Deficit Reduction Action Plan. And I was overseeing the exercise for a suite of um, agencies and departments of six different ones managing an envelope. And so the first point I would make is that, you know, we can't minimize the, you know, the disruption and challenges that, you know, substantial cuts have, um, and that you know, particularly on, you know, the individuals that will be directly affected by um, you know, through employment changes, um, also through, indirectly through the programs that, you know, may eventually be cut if they're considered redundant or not aligned with the priorities. And the Canadians that rely on those programs and also indirectly the communities and in particular Ottawa is likely to, you know, to feel some, you know, some, some pain from, you know, from what is, you know, underway. So I'd first and foremost like underscore that because too quickly, as economists we might say, oh, it's needed, we need to find savings. You can't spend. Uh, because my second point is it is pretty substantial offset to what they, you know, they rolled out in the budget. So you know, you mentioned in the introduction almost 150 billion, um, new uh, spending in the budget that was offset by this um, you know, 60 billion that you indicate in, in savings. And um, you know, the 150 billion is even bigger because that doesn't include the, you know, I think it was roughly 40 billion of what they had already legislated since um, you know, since uh, the spring budget, the spring election and also another 40 billion because of weaker economic and hence fiscal drivers. So yes, you know, second point, it is an important offset, I would say, um, um, on the, you know, on the headcount reduction, I think. Um, you know, I'm sure many of you have seen those charts of, you know, of um, Public serving service jobs that really spiked over the course of the pandemic. And I think that, um, what we're seeing with the attrition targets is it's getting back to somewhere where it was in the kind of the 20, 20, 2021 frame. So I think the public service headcount peaked around 365,000. It came down by about 10,000 last year. Um, and keep in mind, 10 to 12,000 a year is typically about the retirement or the attrition rate. So over the next couple is generally to be expected a degree of attrition if you don't replace. But we know that not replacing creates its own challenges because, you know, somebody on pre retirement, they're not doing nothing. And so, you know, so that again will be, you know, it'll give them some, you know, ability to, you know, consolidate without, um, you know, without laying people off or making, you know, position people redundant. Um, but they'll have to dig a little bit, uh, deeper as well to uh, you know, to make those numbers. So, and I guess the other reflection on, we also didn't have enough detail yet to know about specifically which programs because there's a lot of high language around modernizing services and efficiency. And so you really can't quite read into, um, what that means. But the final point on that would be, um, even when we compare back to the drop or the 2010, um, 2012 cuts, um, they, this, these cuts, if you take a kind of a step back, they're not as big in overall federal government outlays because, you know, they did a nifty little chart and said, like, look, our effort, you know, is about, you know, I think the number was about 4% of, you know, direct program expenditures, you know, mostly including wages and grants and contributions. But, you know, what's different now versus the last two major, um, um, public sector reduction efforts is that, you know, the other part of the federal, um, expenditure balance sheet has really exploded. And that's the transfers, transfers to households and transfers to provinces and other layers of government. And so now though, that other stuff is about, you know, about equal size of, you know, the stuff, you know, the envelope that they are looking at reducing. And so, you know, the overall effort looks, you know, much smaller when you consider that bigger envelope. And so I think that we will maybe not, definitely not this past budget, maybe not the next budget, but at some point Canada and the federal government is going to have to think about that other part of its expenditure outlay and is it aligned with where we need to go or is it at least aligned with where markets think, uh, the country needs to go?

Speaker C: Yeah, for sure. And you touched on the offset of uh, cutting government workers do offset some of the, the spending. Another area that the Carney government has, uh, kind of reduced income, uh, is by cutting taxes. You saw the middle class income taught, the digital services tax, uh, the reduction in the capital gains tax proposed by Trudeau. Um, is this a sustainable fiscal strategy? Can they continue to keep cutting taxes while also, um, continuing to spend bit.

Speaker A: You know, one of the, um, one of the biggest lessons I've learned over the course of my, uh, kind of career, my very career from within government and outside of government and critiquing other governments at the International Monetary Fund is that there is this kind of socioeconomic or geopolitical overlay that we as economists can say, you know, that was right or wrong. And then, but you know, politicians, elected officials have to weigh other considerations apart from economic ones. And so I think one of them is that, um, you know, Canadians are still feeling kind of this affordability crunch coming out of, you know, high inflation, high interest rates, you know, even though inflation is just a bit above target, kind of underlying inflationary pressures. Price levels are higher, house prices are still higher. So there is this kind of, you know, um, socioeconomic consideration. And we even see in sentiment data, polling data that, you know, Canadians have almost, you know, normalized what's going on in US Policy uncertainty. And now they're back to worrying about, you know, the things that, you know, we've worried about in the past, you know, notably around affordability. So I think, you know, part of, you know, likely what we see in some of those measures is some reflection of that. But I would say, um, you know, one of the, as, you know, putting my economist hat back on now is that the bigger challenge for Canada, I think on the tax front is that it's not, you know, it's composition of taxation is out of, out of whack. And so, you know, personal income taxes are high. Um, and you know, they are, you know, they're rightly progressive, but the higher brackets kick in at a, you know, a relatively low rate. Our corporate income tax rates are also, you know, high. Now there were some very targeted measures on the investment side only that made us a bit more competitive or even more competitive than the US all else equal. Um, but our consumption taxes are really low. So we do need a rebalancing and I would add another taxation that we need to talk about more, but that's not on the Federal tax balance sheet. But we actually do have um, one of the biggest wealth taxes among OECD countries. And we don't you know, acknowledge it as that, but property taxes. So the taxation that, you know, the 60% of Canadians that own, own their own houses are paying increasingly higher property taxes. And that um, you know when you look at kind of OECD data you see that's a prop tax on uh, you know, property of Canadians. Um, but that's also out of balance because we know that municipalities have very few revenue levers and that's one of them in development charges, um, also on, for, for new construction. So you can kind of see all the imbalances in system. But it's very difficult to you know enact broad based uh, tax reform. And you know we know that the federal government in the carney platform had promised a corporate tax form. You know I personally had thought they would come out with a commitment. Okay, we're about, you know we're going to launch it now. But they didn't in this budget. Uh, but we need an even more comprehensive tax reform that looks at you know, the inter linkages between personal and corporate and consumption and then across layers of government, um, you know, reaching right down to minimum municipal levels of government to see do we have on aggregate attack system that kind of fit for purpose in terms of you know, growth oriented and redistribution and you know, efficiency and, and you know, fit for kind of even the AIE even fit for the AI age in terms of where um, you know, where we might be going and we're not there yet. That stuff takes time and it takes a lot of political capital. And I think both of those are kind of short right now. And so you know, I think give them a pass for doing what they could, you know, urgent and critical which were tax reform to incite business investment in a very targeted fashion. Um, and you know earlier the personal income tax measures. But you know, at some point again you know we do need to come back to that broader tax reform.

Speaker B: Right. Uh, you brought up some really, really interesting point there talking about like the imbalance in uh, income, income uh sources and taxation, and taxation system. And I really want to ask uh, you like a burning follow up question. Uh, so I can't help uh, but make that parallel. France is currently kind of losing their hat right now debating about like this uh, wealth taxation policy proposal. Um, is. And you mentioned that the higher tax bricket for Canadians is actually coming in very low. Uh now we can say it's actually kind of uh, Taxing like middle class Canadians. So my question for you is, should the government maybe consider a proper, well, tax, um, other than obviously the property tax that uh, generate revenues for municipalities?

Speaker A: Well, I think um, you know, I'd first say, um, no. And you know, first politically, if you see what's happening is that it's very difficult to enact. But also um, you know, wealth and capital is mobile. So you know, the countries that have, you know, tried this see it mobile. So I think, you know, first and foremost and also I would say, you know, another kind of lesson, you know, I take away over the years, you know, practicing as an economist, you know, in multiple sectors is like you always have to question, you know, what you think or you know, what your dogma is around an economic um, um, policy. And I recently actually saw a French economist speaking at an IMF event and she was talking about a France experience where they cut payroll taxes for the lower, lowest income bracket because they thought, you know, those are in most need. But when they actually kind of studied the impacts of what that did, it actually um, prevented kind of that those middle class jobs that a lot of, you know, people got stuck in, those low income because of then that you know, payroll taxation wall for businesses, you know, to, you know, to ups, you know, to upgrade, um, ah, positions and jobs. So you know, that my takeaway when I heard that was, you know, we sometimes have these preconceived notions and it might be that well, if we just tax wealth, we'll get more revenue. Um, you know, and, and I think that's one of the areas where we're probably wrong if that's what we think happens. And, and so I think, you know, overall, um, you know, I think we need this broader review of taxation are um, you know, are the levers, um, you know, growth enhancing and then thinking also about redistribution. But you know, if you think, you know, and probably this is a bit of a mistake Canada's made is that they redistribute first and then they think about growth. But you have to find that, you know, that right mix now. You know, I think we got there because we thought too much about growth and you know, redistribution as an aftermath. So we're kind of course correcting. But I do think, um, you know, we've forgotten about those growth engines. And so that's also, you know, the idea of if, you know, you want people, you want entrepreneurs to aspire to grow, you know, to aspire to, you know, be able to um, you know, turn their companies into profit and you know, reasonable profit. And where I think governments can focus is on, you know, keeping markets contestable. So you don't want excessive rent, you don't want this idea that, you know, that, that there are, you know, monopolies. And you know, particularly we're seeing this UNF holding in sort of the AI, initial development. But you, you do want new, you know, new players to, you know, to be able to come in. And so I think, um, you know, that's certainly, um, you know, something, something to consider. But. And if I can just add one kind of stepping back again, you know, you brought up France and you know, we saw UK and you know, in a, you know, it's been in a tricky situation trying to get, you know, a budget passed with, um, reform and austerity. And I think, um, you know, it's often quipped that no one really knows what level of debt is sustainable for a given country until they hit that wall and then markets tell them and it's too late. And so I think we are seeing other countries that, you know, you know, even just a few years ago, we thought they were completely safe and fine. Um, but they wait, you know, they've waited arguably too long to address some of the structural budgetary pressures, uh, you know, to, you know, to be able to move forward on fixes in a kind of a very careful, methodical, thought out way. And so I think that's what, you know, my read is what Canada is, you know, trying to do, or should be trying to do is like fixing some of those structural imbalances now before markets force us, because we're actually in a pretty good place. Um, but if we, you know, if we, if this investment agenda, this kind of capital, um, discipline, you know, isn't as disciplined as, you know, as we're told it will be. We do run that risk that we get to that place where we're, we're kind of desperate, kind of deer in the headlights trying to find revenues to, you know, keep markets happy in the, in the short term.

Speaker C: Yeah. And then kind of just to move on for the sake of time. The. You touched on the operating budget a little bit earlier. Um, the government's new approach to budget reporting is under a lot of scrutiny. Um, there's a lot of kind of new words being thrown around for the everyday Canadian dividends, investments, operations and how this ties into the budget. What does that distinction between operating and capital spending really mean for our listeners out there?

Speaker A: You know, they, you know, they did. Uh, so I'll first say, you know, there's no other country that's done exactly this. There are a couple of comparators that um, you know, that they set out in the budget. Um, but it really is a, uh, kind of a Canadian made definition and very high level. What they say is, you know, any money, any spend, any investment that we make that creates an asset on anybody's balance sheet. So it's not just you know, the federal government acquiring or you know, building infrastructure and having that you know, physical asset or IP product on its own balance sheet, but it can be through you know, tax incentives that are designed to enable private sector to, you know, build and invest either intangible or tangible assets. Um, so that is, is you know, that test of um, you know, is it creating an asset that they're setting out now they go through and you know, when you get into the annexes of the budget, they tease out, you know, exactly what, you know, programs qualify in that space. And I would say overall, um, you know they, they lay out a framework that's coherent with what they say. They're going to balance the operating um, budget over the, you know, over the three year horizon and they're going to keep that capital envelope uh, growing. Now it very roughly doubles from about 30 billion, um, you know, current fiscal year to a bit above 60 billion over the five year horizon. Now you know, I would say, you know, it's, the incremental amount is fairly small and maybe that's where it was a bit underwhelming is that the incremental is only about 15%, um, you know, top up to that total uh, capital, uh, spend. And so I think, um, you know, there's probably a bit more space. We know that deficits, you know, are two and a half percent this year, but they're running down to about you know, somewhere mid 1% range over the horizon. They said they're going to keep that trajectory down. So I think they've got a bit of space to do more. But I think also, you know, back to the earlier discussion about um, you know, the depth of um, you know, expenditure reduction and that I think that you know, probably going forward it's not just running, you know, higher deficits to uh, fund more capital investment, but also thinking about, you know, going further than, you know, an operational balance and thinking about, you know, how, you know, how we might dig deeper on that side of the balance sheet as well. And then the other point I would make is that we don't have enough information to really measure results. I would argue that the one Indicator as economists that we can be watching is um, you know, in national accounts you can see the non resident. This is going to get really wonky. Sorry. You know, your non residential uh, um, structures or your non residential um, um, business investment. You know you can look at the stock and flow, but those are slow moving and you know it takes time for some of this to you know, to really hit the real economy. So over time that will be kind of proof in the pudding whether this has led to, you know, capital, um, you know, capital uh, investment and you know, growing growth of that stock. But you know, in the near term I think we are going to need more information on just, you know, how rigid and how constraining is this new capital framework to make sure that the stuff under that capital budget is actually leading to asset creation.

Speaker B: Right. A lot of economists, a lot of experts still wonder how much this new capital plan will compare to let's say the draggy report in Europe or the inflation Reduction act in the US that uh, are requested or provided a lot of uh, capital investments. Time will tell us. Uh, Rebecca, I do see time flying by. Uh, there's a lot more we'd like to discuss, but I think we'll bring this to uh, to a conclusion. This budget was widely described as both ambitious and austere. A plan that pairs massive investment with significant cuts. And so the conservatives have tirelessly um, attempted to convince the public that Prime Minister Arney is no different from his protester when it comes to the talks. In your own view, how does this budget compare to the fiscal strategy we saw over the past 10 years under Strudel's government?

Speaker A: This is a different fiscal strategy. So we talked earlier. This is a supply side budget and we've lived through a decade of mostly demand side or kind of consumption driven stimulus. So it's turned the ship into a different direction. I would say. I reserve judgment on the use of transformation. And the way I would frame it is that the federal government is setting the table, but others have to come to the table. And it's only transformational if you know, business and other sectors really buy into it and come to the table with capital investment. Because, um, I think that uh, uh, at the end of the day, federal government can reduce taxes, they can use their procurement powers, they can use infrastructure, but they can't carry the whole economy. They are going to carry a significant portion of the growth over the next couple of quarters through the investments already in the pipeline. But over the long run that's not sustainable and we really need Business investment at the table. And so I would say, you know, they're, you know, doing the stuff that we would, you know, read about in textbooks of what you should do to enhance, um, supply. But there are a lot of headwinds, you know, and you can think of a long laundry list as easily as I can that are, you know, keeping business leaders up at night thinking about whether or not to make that investment. So I think the federal government has, you know, removed at least one uncertainty in, uh, putting some carrots in front of, um, business leaders. But, you know, time will tell. Is this transformational? And I think we, you know, we can expect, uh, you know, at least another budget, most likely, uh, to build on this one and at that point more data to know which path are we on of real, um, real evidence that it's working or, you know, lots of stall and delay.

Speaker C: Yeah. And just to kind of. To ask one final question before you leave here, um, you mentioned transformational in your answer a couple times. Uh, the government has framed it as transfer, as transformational. In your view, do you think it will live up to that promise? Um, if so, why, if, if so, why not?

Speaker A: We buried in the budget. The prime minister, and I should say, um, you know, the prime minister in press release and the finance minister, you know, they talk about this trillion dollar ambition around raising a trillion dollars in investment, including public and private, over the next five years. That is ambitious. And, you know, it'll take everything, you know, everybody rowing in the same direction to get there. I think what they're putting on the table, um, you know, should get us heading in that direction. But we will kind of face lots of waves, lots of kind of tumultuous, you know, turns along the way. And so I would say, you know, overall, um, you know, I think, you know, again, I think it has the makings to be transformational. But we can't and shouldn't expect the federal government alone to be able to get us there. That we do need, you know, collaboration and we do need, you know, everything to kind of, you know, work in the right direction to, you know, really have that meaningful impact. And the biggest thing that we're going to need is patience. And I think, you know, again, that's really challenging politically because, you know, on supply side, it takes time for this to, you know, lead to, you know, better jobs, better wages, you know, better household income, better quality of life. And so again, that's, you know, never clear what, you know, what is that political shelf life. But unfortunately, in terms of, you know, textbook economics. That's really what's required to, you know, to sustainably lift welfare over time.

Speaker B: Rebecca, I think this concludes our episode today. Thank, uh, you very much for your, uh, very, uh, insightful and nuanced commentary, uh, there.

Speaker A: Thank you.