An investment banker’s dream budget

If you think Ottawa has just delivered an austerity budget, the smoke and mirrors have got you: it’s simply not true. It’s buried on page 238, but federal program spending, which excludes interest on debt, is forecast to rise by 16 per cent from $490 billion this fiscal year to $568 billion in 2029-30. During the current year alone, the spending increase is a remarkable seven per cent.

Public debt charges will soar by 43 per cent from $53 billion to $76 billion due to growing indebtedness and higher interest rates. No surprise there. Deficits — $78 billion this year alone — accumulate by a whopping $320 billion over five years. That is quite a legacy we’re leaving young Canadians.

You might think the budget has been cleverly crafted by Keynesian economists who believe big-government deficit spending is the best way to counter slow economic growth. Given all the anxiety over prices, U.S. tariffs, income and jobs, affordability has become a key voting concern.

But this is not a Keynesian budget with big spending on social programs. To the Liberals’ credit, they recognize productivity has been so poor that the budget needs to focus on our lacklustre investment climate. Given this focus, it is an investment banker’s dream budget. Instead of tax and regulatory reforms to spur investment in all sectors of the economy, the government will pick specific priorities in “partnership” with the provinces, municipalities and private investors.

In case you missed the slogan, the budget says six times it’s a matter of “spending less to invest more.” Annual capital spending on infrastructure, housing, defence, and tax giveaways (which we’re the only country to count as capital spending) will double from $30 billion a year to $60 billion a year over five years.

Ever wonder what investment bankers do? We’re about to see. The Prime Minister Mark Carney, Clerk of the Privy Council Michael Sabia, and Minister of Natural Resources Tim Hodgson all have histories in investment banking. And more such bankers will likely be recruited to serve in the public service, as the budget’s newly branded Build Canada Exchange (previously Interchange Canada) will be looking for 50 new leaders in finance, technology and science.

What investment bankers do is make deals. They help raise capital, provide advisory services, manage clients and underwrite securities. Going through the budget, it is striking how many investment funds the Trudeau and Carney governments have set up. Unlike private investment bankers, however, who must find investors to provide equity and debt financing for projects, government investment bankers use captive taxpayer money to guide capital investment in politically chosen directions. Our public-sector investment bankers are about to allocate a lot of money in this way. According to the budget, capital spending is expected to total $480 billion on a cash basis in the next five years.

The problem with industrial policy is that it requires central planning. As Friedrich Hayek pointed out in “The Road to Serfdom,” a tremendous amount of information is needed to make proper decisions. To minimize mistakes, socialist governments seek greater control over the economy, which undermines democracy, as history has shown many times over.

Public spending on government-owned infrastructure is obviously important. But as soon as government interferes in market decisions, central planning bogs down. Take the EV battery market. Ottawa and some provinces have funded it with billions of dollars in operating and capital subsidies that have certainly raised investor returns. But governments did not anticipate consumer resistance to buying EVs. In the face of weak demand, Stellantis and Volkswagen have suspended or halted investments, while Sweden’s Northvolt went bankrupt.

Central planning also allows politicians to impose political criteria that lead to poor economic value. The major projects to be approved by the federal government need to satisfy four criteria: strengthening Canada’s autonomy, resilience, and security; successful project execution; advancing the interests of Indigenous peoples; and contributing to clean growth. But how about picking projects with large impacts on GDP and profitability? Alberta will have noted the budget carefully avoids mentioning what would in fact be a highly profitable oil pipeline to the West Coast, even if it were saddled with shipping the high-cost “decarbonized oil” that no other country has insisted on.

Other criteria for political approval include hiring standards, local sourcing and diversity, equity and inclusion requirements. The budget will provide $1 billion to attract international talent to universities but is silent as to whether current DEI targets will remain a condition for hiring. Just as high tariffs would, the budget will impose domestic purchasing requirements on public procurement. That’s bound to increase project costs.

Even the few tax measures are directed at politically chosen investments: manufacturing, venture capital and clean energy. The 2018 accelerated depreciation rule is reintroduced and further enhanced by a “productivity super-deduction” that will provide expensing for manufacturing buildings and some enhanced LNG capital allowances and R&D tax credits. As the budget concedes, manufacturing will be the primary beneficiary, continuing a half-century-old growth strategy that has not stopped the secular decline in manufacturing value-added and employment.

We might be spending less and investing more in this budget but it’s all from the same mould: more central planning and bigger government. We will see if Canada Planned builds out Strong or not. One thing can be predicted: ribbon-cutting ceremonies for the next five years.