A Reset Anchored in Disciplined Risk-Taking

CANADA NEEDS A JOINT FISCAL AND MACROECONOMIC ACCOUNTABILITY FRAMEWORK

• Canada’s federal government is finally making a serious push to reverse weak productivity and investment trends. The upcoming budget is expected to set out a bold—and necessarily risky—reset to get the economy back on track.

• The bottom line will no doubt garner much attention with a string of larger deficits ahead and a debt trajectory highly sensitive to economic conditions.

• There have been calls for smarter fiscal guardrails to keep the government on task while providing space for transformational investments. This would be a start, but fiscal guardrails should be coupled with clear macro economic goals such as a GDP per capita and non-residential investment growth targets to ensure that policy execution is also measured against tangible economic outcomes.

• Fiscal accountability alone isn’t enough if growth is the objective—economic outcomes must also be tracked.

A RISKY RESET

President Trump’s election and the associated economic threats to Canada and other trading partners have triggered a long-overdue reckoning with the sources of Canada’s economic underperformance. These challenges have been known for many years, but far too little effort has been devoted to address them. It has taken threats from our most important economic relationship to bring these challenges in focus and prompt serious political attention. There is now broad recognition that Canada must dramatically boost productivity and non-residential business investment if we are to reverse and lift our standard of living as measured by the flawed, but informative, metric of GDP per capita.

Canadian firms and households are placing high hopes on a serious course correction by policymakers at all levels of government. Early signs—notably Bill C5 and provincial agreements to liberalize interprovincial trade barriers—suggest momentum is building. But Canadians are looking to the upcoming Federal budget for additional concrete measures to be taken by PM Carney as he works to transform the economy and catalyze private finance.

These efforts are likely to come at substantial fiscal cost. Whether these costs and the resulting deficit prove warranted or excessive will be a joint function of their impact on the fiscal and economic tracks. For too long, government accountability has hinged too narrowly on meeting their deficit forecasts or lowering the debt-to-GDP ratio. Even these low bars have proven difficult for governments to live up to despite surprise tailwinds in past years. Moreover, markets have not penalized the Federal government for its budgetary execution in recent years, thus have yet to serve as a meaningful accountability mechanism. And by the time they do signal concern, it will likely be too late to avoid serious disruption.

A RESPONSIBLE RESET

We suggest a broader accountability framework might serve Canadians better. It would have two components: accountability against some macroeconomic objective along with accountability for fiscal outcomes.

There has been far more reflection done on fiscal accountability, including very recently by the Business Council of Canada. Their consultations with a broad range of stakeholders explored how best to define Federal fiscal anchors. Unsurprisingly, while consensus was elusive, the authors of the report propose a number of very sensible indicators and principles that could serve as an anchoring framework for fiscal plans and outcomes. These include:

1.      “Adopt a dashboard of metrics and guidelines that shows a sustainable track over the medium term even under stress-tested scenarios. No one anchor tells the full fiscal story. For most, “sustainable” means a “contain and reduce” approach to Canada’s deficit and debt burdens. 

2.      Ensure guardrails are practical from a government operations perspective and translate into actual real constraints. 

3.      Design a fiscal framework that is growth-enhancing and supportive of investment, both public and private.

4.      Ensure that anchors aren’t easily abandoned and the framework is binding on the government. This is where credibility is won and lost.”¹

Equally important, we believe fiscal accountability must be complemented by a macroeconomic commitment mechanism. Put simply, debt is far less concerning when it generates a sustained rise in productivity and living standards. The real risk lies in fiscal policies that fail to deliver those outcomes. The federal government’s commitment to balance a new operational balance with a carve-out for capital spending should provide a framework to drive discipline in the expenditure review—and could helpfully make it a feature of ongoing reallocation—but it still focuses on inputs not outputs with little transparency around impacts.

We’ve long advocated for a GDP per capita growth target as a way to orient and evaluate government policy settings. The idea is simple: GDP per capita is a rough but useful proxy for living standards, it has fallen in the last few years, and a policy agenda squarely committed to raising it would generate substantial improvements in the well being of Canadian firms and households. Importantly, a clear commitment to raising it would force a filtering of policy initiatives based on their expected impact on economic growth. In the absence of a hard budget constraint that would force governments to make real trade-offs, such a macroeconomic objective could introduce discipline and trade-offs when raising and spending taxpayer resources. Moreover, it would provide Canadians with a clear sense of what the government’s economic agenda means for their everyday lives.

Achieving a GDP per capita target is impossible without a significant increase in non-residential investment and a concomitant increase in productivity. A credible macroeconomic commitment should therefore also include an explicit investment objective. Our earlier work estimated that a pace of investment growth that exceeds pre-pandemic trends by $60bn a year, along with an annual increase in multi-factor productivity growth of 1.3% would be required to achieve a yearly increase in GDP per capita of 2%. These could form the basis of formal GDP per capita, investment and productivity objectives. A less ambitious GDP per capita would naturally require less investment and lower productivity growth.

We recognize that such a macroeconomic objective may be unappealing to political leaders. Committing to targets—and the accountability that should follow—can be risky, especially when outcomes fall short. Economic impacts of policies can be time-varying and are often uncertain, with unanticipated shocks regularly derailing plans. To ease this burden, the macroeconomic objectives could be multi-year commitments rather than annual targets. Elevating the profile of the country’s capital stock in such a framework would also help evaluate broader progress. Annual outcomes would still serve as a check to inform if policies are on track to deliver for Canadians.

CANADA NEEDS DISCIPLINED RISK-TAKING

The experience in dealing with President Trump underscores the need for stronger economic management from Canada’s political leaders. Canadians no longer accept the poor results that have come to characterize Canadian economy. Our country is blessed with massive natural resource wealth, one of the most highly educated workforces in the world, and preferential access to many advanced and emerging economies. The challenge now is to maximize the full potential of these incredible advantages.

Prime Minister Carney appears to be readying Canadians for generational investments to do just that. The November 4^th budget should reveal the scope and cost of these plans. Given the expected rise in deficits associated with these transformational investments, we recommend the government put in place robust accountability mechanisms to ensure fiscal resources are deployed with clear macroeconomic objectives in mind. This requires a fiscal framework anchored along the lines suggested by the Business Council of Canada coupled with a clear commitment to raising living standards through a GDP per capita and non-residential investment growth objective.

¹ T. Argitis and S. Dupont “Chairs’ notes; 2025 Budget Consultations”, Business Council of Canada, 2025.