Steve Ambler is a professor emeritus of economics in the École des sciences de la gestion, Université du Québec à Montréal.The word “catalyse” or variations of that word appear 35 times in the federal budget which the Liberal government tabled on Wednesday. On page 61 of the 493-page document, we read, “In addition to these anchors, the government’s new fiscal approach will be driven by one overarching target to catalyse $500 billion in new private sector investments over the next five years, by focusing federal spending toward capital formation and projects that attract private investment, creating a virtuous cycle of investment and economic growth.” [emphasis in original]This is an ambitious goal. There is just one problem: if we can take the government’s own projections at face value, achieving this goal will severely damage household consumption, net exports, or a combination of the two, as shown below.The budget projects Canadian gross domestic product (GDP) to grow on average by 1.6% annually between 2025 and 2029. Using fiscal year 2024-25 as a baseline, federal government spending is projected to grow more quickly, by 3.5% annually on average until 2028-29.Two conclusions follow. First, the ratio of government spending to GDP will necessarily be increasing over the budget cycle. Second, this is a “dirigiste” (economic planning and control by the state) budget. The government apparently thinks growth in private investment will result more from increased government spending than by giving private businesses incentives to invest more by providing tax relief. Indeed, federal government revenues are projected to increase by an average of 2.5% per year, faster than GDP growth. One section of the budget (page 55) has the title “Canada’s New Industrial Strategy.” This is very telling and shows that the government thinks it, rather than private industry, knows best where to invest..The basic arithmetic of national accounting says that a country’s GDP must be spent on private consumption, private investment, government spending, or net exports (exports minus imports, which equals the trade balance). Expressed as a percentage of total GDP, the sum of these four components must by construction add up to 100%.Once again using fiscal year 2024-2025 as a base, government spending as a percentage of GDP will be higher by 1.2% on average over the four years starting in 2026. If the aspirational increase of $500 billion in private investment is spread over those four years and grows at the same rate as GDP, the incremental investment spending will amount to 3.9% of GDP in each year.The bottom line: since the sum of private investment plus government spending (relative to GDP) will increase by 5.1 percentage points in each year, the sum of consumption plus net exports will have to decrease by the same amount in percentage terms each year. Depending on the split between the two, this could mean much slower growth of both of these components of GDP, or even stagnation or a decrease in their levels.This would be bad news for Canadian households. Many of them are struggling to pay their grocery bills and meet their mortgage payments, so it’s perhaps plausible that they would have to cut back on some of their other spending..However, it’s also just arithmetic. More likely, it shows that the assumptions built into the projections in the budget are flawed. This would also mean that the aspiration of $500 billion in additional private investment is just a pipe dream.The other flawed assumption: government knows best.Steve Ambler is a professor emeritus of economics in the École des sciences de la gestion, Université du Québec à Montréal.
