Canada’s investment ambitions face budget credibility test—can Carney deliver?

As published in The Hub

Almost exactly a year and a half after winning the federal election, Mark Carney’s ambitious agenda to transform the nation’s economy through an investment-first economic program has become pretty apparent. Increasingly, so has the scale of the financing involved.

Carney’s second budget, to be released Nov. 5, will shed more light on the extent to which his government is using the federal balance sheet to drive that agenda and the fiscal risks the governing Liberals are taking in the process.

The Parliamentary Budget Office estimated in a recent report that federal borrowing will rise by $733 billion over the next five years. About half that amount reflects projected cumulative deficits, with the remainder largely financing infrastructure, housing, and other capital purchases, including military equipment.

The end result, according to PBO projections, is that public debt charges will rise to $83 billion annually by 2030–31, from $59 billion this year and about $25 billion five years ago.

Graphic credit: Janice Nelson

Some of those costs will be offset by income from the investments being made. But the increase will still draw a lot of attention at a time when borrowing costs have been rising, and questions about government debt are growing around the world.

This scrutiny is a good thing.

Carney is asking Canadians to support an ambitious investment agenda, and they deserve a clear picture of what it costs, what risks it entails, and what they can expect in return. The budget is an important checkpoint.

So how should we assess it all and think about the coming fiscal plan?

First, there is near-unanimous agreement in the business community on the need to increase investment in the economy to boost Canada’s lagging productivity and strengthen the country’s economic sovereignty and resilience.

And there is growing acceptance that this needs to include more active use of government balance sheets. Many other countries are using fiscal levers aggressively to gain economic advantage. We are in an era of economic statecraft, whether we like it or not.

Carney has not only embraced this idea but is clearly poised to test the limits—both political and market—of how much to borrow to transform the economy.

Second, Canada enjoys a substantial borrowing-cost advantage over other countries. In fact, the gap between Canadian and U.S. government bond yields has been hovering near record levels, with Canada paying a lot less.

Many factors influence global bond yields and investors’ willingness to buy our debt. Confidence in Carney’s agenda is clearly one factor. At the very least, markets have continued to finance the government on favourable terms as it pursues its plan, in part because investors know that growth is the foundation of sustainable fiscal policy. France should serve as a cautionary tale for policymakers about the perils of persistently high deficits that are not tethered to a growth agenda.

Third, the borrowing numbers and projected debt charges reveal considerable risk associated with Carney’s agenda. Carney is placing big wagers, and the stakes for us all are high. Getting it wrong, which means failing to secure the long-term economic payoff from all this borrowing, could undermine our prosperity for years, if not decades.

So getting it right matters, and there are certain best practices the government should adhere to maximize the likelihood of success.

It starts with choosing commercially viable projects—need-to-haves rather than nice-to-haves—when leveraging the government’s balance sheet. The weaker the commercial rationale, the harder it becomes to sustain confidence in the plan.

It means being politically disciplined about balancing the operating budget, the government’s primary fiscal anchor, and resisting the temptation to relabel all spending as investment.

It means shifting emphasis to quality of spending. A real “first principles” program review with teeth would be a strong signal of the government’s seriousness. This involves asking fundamental questions of every program: Should the government even be in this space?

And it means as much transparency as possible on off-budget borrowing, which will act as a disciplining force on the government.

The more the government follows best practices, the more likely investors and Canadians are to gain confidence in its borrowing-heavy economic agenda.

There are signs the government’s economic plan is working. The mood in C-suites today is as hopeful as it’s been in a very long time.

Since last month, announcements have been coming fast and furious: LNG Canada Phase 2 and Coastal GasLink Phase 2; Bell’s AI Fabric hub in Saskatchewan; EverWind’s data centre in Nova Scotia; Cariboo Gold; and Wolf Midstream. Not to mention the Aug. 17 agreement covering Churchill Falls upgrades and electricity infrastructure in Labrador.

There is even talk of being on the cusp of an investment supercycle—a phrase coined by economists at TD Bank and quickly adopted by the government.

The budget is an opportunity for the federal government to put a more durable foundation under the optimism.