During this summertime, when for many the living has not been easy, a lot of the stress has come from forest fires to the north and Trumpian tariff threats to the south. Less attention has been paid to another possible source of angst – the state of Canada’s public finances.

In the recent single issue “who-can-best-handle-Trump” election campaign, there was little notice taken of financial details of party platforms – possibly because those manifestos were a lot alike, with projected numbers subject to the economic uncertainties brought on by the U.S. government.

The major parties all promised tax cuts and deficit spending. The Liberals and Conservatives said they would increase defence spending to two percent of GDP by 2029, while the NDP would take until 2032 to meet that target. And all three claimed they could control spending with efficiencies, although only the Conservatives talked about program cuts.

But what a difference a few months in office has made for Mark Carney’s Liberals. Instead of spending $18 billion over four years to get defence spending to the NATO-mandated two per cent of GDP as promised, Carney has agreed to spend maybe $100 billion more to reach five percent of GDP by 2035.

And instead of reducing spending through efficiencies, the government now wants 15 per cent in cuts across all federal departments over the next three years, with notable exceptions like the Department of Defence, the RCMP and Canada Border Services. It’s an initiative that’s been greeted with yawns in some circles, alarm in others.

One of the alarmed is David Macdonald of the Canadian Centre for Policy Alternatives ,who in a commentary last week dismissed the thought that the 15 percent cuts can be delivered painlessly by not replacing employees who leave or whose contracts expire.

“However, the July brief sent to ministers will have much more dramatic impacts,” he writes. “More than half of the ‘savings’ will likely occur by cutting transfers—all while staffing and professional services are also cut.” 

Alarming details

Without getting too far into the weeds, here is the essence of Macdonald’s case. Carney has promised not to reduce major transfers to the provinces, seniors’ pensions, child care or employment insurance, outlays which account for about 60 percent of federal spending. That leaves an operational budget of about $190 billion, from which the government wants to find $25 billion in savings. 

Anyone who has bought into Poilievre rhetoric about Justin Trudeau’s bloated civil service may say, no worries, we’ll find the savings by getting rid of bureaucrats. The problem with that is, according to Macdonald’s reckoning, of the $190 billion operational budget, only $42 billion is spent on core personnel. Finding $25 billion in savings from there would mean firing about 60 percent of the work force, unthinkable unless you are Elon Musk.

Even finding modest savings from reducing personnel would be difficult. The big departments accounting for 25 percent of personnel – Canada Revenue Agency and Employment and Social Development – have already undergone staff cuts and are having a hard time responding to the public on issues like taxes or employment insurance.

With deep cuts to personnel impractical, David Macdonald predicts that achieving significant savings will mean cutting from the $80 billion worth of transfers included in the operational budget, transfers that pay for a variety of programs run by all three levels of government. With pensions, child care, and major provincial transfers ruled out, smaller transfers to the provinces and a range of other grants for things like housing, transit, infrastructure and research could be targeted.    

 “Deducing from the brief what might be subject to deeper cuts, all fingers point to: First Nations social programs, veteran supports, refugee and new Canadians supports, international assistance, and scientists,” writes Macdonald.“This was not what was proposed in the Liberal platform during an election that is just a few months behind us.”

Deficit worries

While David Macdonald and public sector workers are spooked by the the prospect of cuts, the business lobby is worried about the deficit. The Liberal platform projected a deficit for this fiscal year of $62 billion – the highest since the pandemic – declining slightly in future years.

But the C.D. Howe Institute sees the deficit rising, estimating that paying for the promises in the Liberal platform, combined with newly-announced increases in defence spending, will lead to federal budget deficits averaging more than $77 billion over the next four years.

The Institute also doesn’t seem to believe that going after the operational budget is the answer to curbing the deficit. Instead, it recommends cutting major transfers (i.e health, equalization) to the provinces and territories, delaying costly platform commitments and increasing the five percent federal sales tax. 

In that vein, Michael Wernick, the retired former head of the federal public service, has called for a two-per-cent “defence and security tax.” Applied for 10 years Wernick says it would be a “very visible piece of public finance” that Canadians would understand the need for.

The Carney government seems to be stuck between the proverbial rock and a couple of hard places – painful but largely ineffective cuts, tax increases or continually growing deficits.The cuts and the tax increases will be unpopular with the public and will threaten intergovernmental unity, especially with First Nations. Running increasing deficits will go over badly with big business and anyone worried about the impact of debt on future generations. 

Enlisting the rich

Mark Carney has accused Trump of “trying to break us” through economic warfare. Given that Canada is in a struggle for survival, the solution may lie in adopting an expanded version of Michael Wernick’s “defence and security tax” to a broader base – one that includes wealth. There’s plenty of precedence for that.

In the past when we have been at war more was expected from those with the greatest ability to pay. The first world war saw introduction of the income tax and during the second war personal income tax rates on high earners were increased significantly to go along with an excess profits tax on corporations.    

One approach to having the rich pay more during the current crisis was suggested last week by Canadians for Tax Fairness (CTF) – curb the use of tax havens. According to that advocacy organization, corporations and wealthy Canadians have stashed nearly $700 billion in tax havens like Bermuda and the Cayman Islands. That’s up 165 percent from a decade ago.

“Prime Min­is­ter Mark Car­ney and his gov­ern­ment know bet­ter than past admin­is­tra­tions that exist­ing laws are not strong enough to pre­vent this abuse,” says the CTF, pointedly. “The Prime Min­is­ter him­self has firsthand know­ledge of how tax havens work from his time in the Brook­field cor­por­ate empire, which has more con­firmed sub­si­di­ar­ies in tax havens than any other com­pany on the S& P/ TSX 60. He is uniquely posi­tioned to get this done.”

The CTF cites one estimate that use of tax havens costs Canada about $15 billion a year, an amount that if collected would help to tame the deficit without the need to cut programs or raise the GST.  

A second approach, and one that has been advocated by the federal NDP in several election campaigns is a wealth tax. According to the party’s 2025 platform, reviewed by the Parliamentary Budget Office (PBO), the federal government could raise $23 billion a year with a progressive wealth tax. The NDP plan would start with a 1 percent tax on households with net worth between $10 and $50 million, two percent for those worth $50 to $100 million and three percent for households over $100 million.

Wealth divide

Asked why he robbed banks, the legendary1930s bandit Willie Sutton allegedly replied “because that’s where the money is.” The same answer could be given to “why tax the rich?” The Parliamentary Budget Office has done a number of studies on wealth showing that tens of thousands of households have more of it than is commonly assumed.

Combining Statistics Canada survey data with information from business publications the PBO has produced reports such as one discussed here. The report estimated that the wealth divide in this country is much bigger than recorded in Stats Canada surveys. In 2016, for example, wealth of the top one percent of families – about 160,000 of them – exceeded $3 trillion, accounting for about 25 percent of the country’s entire wealth. 

More recent Stats Canada surveys on wealth and income distribution show that after federal pandemic supports and rising housing prices narrowed the gap for a year or two, inequality is again on the rise. 

Earlier this month Statistics Canada reported that in the first quarter of 2025 the income gap between the top 40 percent and bottom 40 percent of households reached a record high, primarily the result of high income households gaining from investments while wages declined in the lowest income households.

Wealth distribution reported by Statistics Canada followed a similar pattern – narrowing between 2020 and 2022 but becoming wider over the last three years. In the first quarter of 2025, net worth of the lowest 20 percent of households was almost 10 percent lower than the same quarter of 2022. Meanwhile, the wealth of the top 20 percent rose by 12.5 percent between 2022 and 2025.

The old song says “there’s nothing surer, the rich get rich and the poor get poorer.” But these times dictate that Mark Carney must change the tune. His big business background shows he knows how to go about it, circumstances suggest that, like it or not, he has no reasonable choice. 

-30-