Economists and experts assume that the federal government will raise taxes in the draft budget presented on Tuesday in order to offset billions in new spending that were already promised in the almost daily announcements made since the end of March before the budget was passed.

These announcements add up to commitments of more than $38 billion over several years. Since $17 billion of these commitments are for loan programs, about $21 billion could be directly charged to the Treasury.

And this figure does not take into account other new budget measures that have not yet been announced.

Finance Minister Chrystia Freeland has said the deficit will not increase in this year’s budget. Canada’s economy has so far avoided recession, but growth is still low, leaving the government with no choice but to increase government revenues to finance new spending while keeping the deficit stable.

“I’m pretty confident they’re going to increase revenue because they’ve put pressure on their fiscal position and they’re still committed to spending that isn’t sustainable,” said Robert Asselin, senior vice president of policy at the Business Council of Canada and an adviser to Bill Morneau when he was finance minister. He is also a former adviser to Prime Minister Justin Trudeau and former Prime Minister Paul Martin.

Freeland has repeatedly stated that the government will not raise taxes on the middle class.

“The problem for them is that an additional tax on large corporations or a wealth tax sounds very good, but in practice it is terrible. It doesn’t work,” says Asselin.

Asselin said the government could also “restructure” past spending commitments by pushing the promised money back to a later date, but that would not be enough to keep the deficit under control and would only exacerbate the Liberals’ poor record for actually getting things done.

“Let’s be honest. They need to raise taxes. I don’t think that’s a big secret. But can they do it in a thoughtful, provocative way?” says James Thorne, chief capital markets strategist at Wellington Altus Private Wealth.

“If you do that to high-income people, they will simply move their money abroad.”

Create room for interest rate cuts

Thorne said the government’s top priority must be to demonstrate fiscal responsibility. He said that is the signal the Bank of Canada needs before it can cut interest rates, which would provide Canadians with cost-of-living relief and stimulate the economy.

“Nobody is contesting the social programs that the Liberals are putting in place,” he said. “But can we do that in a fiscally responsible and non-inflationary way?”

Adding to the pressure on Ottawa is the recent proliferation of provincial governments in spending, regardless of the impact on inflation or overall government debt.

Government sources say the Liberals do not want to make the Bank of Canada’s job of keeping inflation under control any more difficult. They also say they know they have little chance of turning their political fortunes around unless interest rates are cut sooner rather than later.

Inflation figures coming soon

Coincidentally, Statistics Canada’s latest inflation figures are released on Tuesday. While core inflation is widely expected to remain unchanged, there is always the possibility of a surprise increase, as the United States’ March figures show.

“If there is a similar surprise as in the USA, it would be quite a scandal that the government wants to pump so much money into the economy,” says Karl Schamotta, chief market strategist at the foreign exchange and payment service provider Corpay.

The three pillars of the budget passed on Tuesday will be housing and affordability, economic growth and fiscal responsibility, senior government sources said.

However, some economists argue that although the pillars of growth and fiscal responsibility have been promised in the past, there has been little evidence of implementation or success.

Prime Minister Justin Trudeau, right, meets with carpenters before speaking about a new housing policy at the CCAT training centre in Woodbridge, Ont., Friday, April 12, 2024. (Nathan Denette/The Canadian Press)

And with the Liberals falling in the polls and struggling to get their message across to voters, many are predicting that this federal budget will be less about public finances and more about measures that could turn the government’s political fortunes around.

“It will be 100 percent a political budget, a pre-election budget,” Asselin said.

“This government has a problem with its fiscal credibility. It promises too much and delivers too little.”

Tuesday’s budget is also expected to target younger Canadians, such as millennials and Generation Z – a voting demographic that sources say the Liberals are actively courting. The spate of housing announcements over the past two weeks points to that focus.