A warning Canadians shouldn’t ignore

There’s a familiar and uncomfortable echo in a report released Wednesday by the Montreal Economic Institute — an independent public policy think tank — that analyzes federal government finances. It’s not alarmist and it’s not partisan. But it is a warning — one Canadians would be foolish to ignore.

Because we’ve been here before.

The report, authored by University of Calgary economist Trevor Tombe and MEI policy analyst Gabriel Giguère, lays out in clear, unsparing terms the state of the federal government’s finances and what it will take to get them back under control.

The conclusion is straightforward: if Ottawa doesn’t start making serious adjustments to spending and taxation now, the country risks drifting back toward the kind of fiscal crisis that defined the mid-1990s.

And anyone who remembers that era knows exactly how ugly it got.

Back then, Canada’s finances were in shambles. Debt was ballooning. Interest payments were consuming roughly a third of federal revenues.

The country’s fiscal credibility was in tatters. The Chrétien government, under Finance Minister Paul Martin, responded with a scorched-earth approach to deficit reduction — slashing spending across the board, including billions in transfers to the provinces.

Martin famously vowed to slay the deficit “come hell or high water.” He did. But the human cost was immense.

Health-care systems across the country were gutted. Provinces, suddenly starved of federal funding, cut hospital beds, laid off staff and delayed investments in infrastructure.

The ripple effects of those decisions are still being felt today in overcrowded emergency rooms, surgical backlogs and chronic staffing shortages. In Manitoba, as well as other provinces, the system is under tremendous strain — a direct line can be drawn back to those cuts.

That’s the cautionary tale embedded in this latest report.

Canada is not in a full-blown fiscal crisis — yet. In fact, Tombe and Giguère note the country’s finances are in better shape than they were in the early 1990s. But the trajectory is what matters. And right now, it’s heading in the wrong direction.

The federal government has run deficits in each of the past 18 years, under both Liberal and Conservative governments. That’s not a temporary blip driven solely by crises such as the 2008 financial meltdown or the COVID-19 pandemic, though both certainly made things worse. Even in more stable times, Ottawa has spent more than it takes in.

That’s not sustainable.

The numbers in the report are sobering. For the 2025-26 fiscal year, federal revenues are projected at $508 billion. Spending? About $586 billion. That leaves a $78-billion deficit — and that’s before some of the biggest pressures really begin to bite.

Those pressures are coming from all directions.

An aging population is driving up the cost of elderly benefits, including Old Age Security. Transfers to provinces — including the Canada Health Transfer — continue to grow. Interest payments on the national debt are rising.

And then there’s defence spending. Canada has committed to significantly boosting military expenditures to meet NATO targets, which will push annual defence spending from about $60 billion today to more than $160 billion by 2035.

Something has to give.

If nothing changes, the report projects the federal deficit will climb to $117 billion by 2035. More concerning, the federal debt-to-GDP ratio — a key measure of fiscal health — is expected to exceed 50 per cent and keep rising. That’s the kind of trend line that should set off alarm bells in Ottawa.

Yet there’s remarkably little public discussion about it.

Instead, government continues to behave as if modest deficits are just part of the landscape — manageable, even harmless. They’re not. The longer they persist, the harder they become to eliminate without drastic measures.

That’s the core message of this report: delay makes everything worse.

Tombe and Giguère outline several options to return to balance by 2035. None are easy. All involve trade-offs.

They include extending and deepening restraints on direct program spending, slowing the growth of elderly benefits (potentially by raising the eligibility age), moderating increases in transfers to provinces and finding ways to boost economic growth through tax and regulatory reforms.

Those are not exhaustive options, and all are up for debate.

But here’s the uncomfortable truth: the choices available today are far less painful than those that will be forced upon us if we wait too long.

That’s exactly what happened in the 1990s. Governments avoided tough decisions for years, hoping growth would solve the problem, or that incremental changes would be sufficient.

They weren’t. When the reckoning came (debt-to-GDP soared to 67 per cent), it came fast and it came hard.

The result was a decade of austerity that reshaped the country, not always for the better.

There’s still time to avoid a repeat. But that window is closing.

What’s needed now is an honest, adult conversation about the size and role of the federal government, the sustainability of current spending trajectories and the tax system required to support them.

That conversation should have started years ago, but it didn’t. So it needs to happen now.

Because pretending there isn’t a problem won’t make it go away.

And if history is any guide, the cost of ignoring it will be paid not just in dollars, but in diminished public services and a lower quality of life for Canadians.

We’ve seen that movie before.

There’s no reason to watch it again.

» Tom Brodbeck is a Winnipeg Free Press columnist.