Cuts, Cuts, and more cuts

Carney is taking the opportunity of Trump to cut taxes, the federal public service, and "red tape".

Photo by Dan Cristian Pădureț on Unsplash

Canadians have been told by several newspapers that Finance Minister François-Philippe Champagne has sent two letters out to all cabinet ministers, telling them to find “ambitious” savings ahead of a fall budget. The letters themselves aren’t public, and there are a number of details that aren’t clear, but we do know that cabinet ministers were given targets of cutting 7.5% for 2026, 10% for 2027, and 15% for 2028. Toronto Star reported that would work out to at least $21.5B in the final year.

The manner of making this information is super sketchy and problematic. We’ve been given specific percentage targets - but we have not been given a very important detail - 15% *of what*. The timeline for Ministers to make their decisions about dramatic cuts is about two months. During the summer. Without any process or guidelines other than a very brief common mandate letter issued in May. The reported size of the cuts are dramatically larger than what Liberals just campaigned on, and the promise they made in the election was to leave transfers in place, and cap - not cut - the public service.

Cuts of this size bring to mind Jean Chrétien & Paul Martin’s 1995 Budget that made dramatic cuts to the federal public service (and a lot of other things), or Stephen Harper and Jim Flaherty’s 2012 Budget, that cut 19,000 federal public service jobs as part of their Deficit Reduction Action Plan (DRAP). The 1995 budget cut nearly 19% of operating spending, 2012 was closer to 7%. Both spending reduction plans came about as a result of a multi-year process.

So despite what you’re sure to hear from the usual suspects, figuring out how to cut 7.5% across the board out of the federal government’s operational spending in the next 60 days is going to look a whole lot more like DOGE than anything folks expected when they cast their vote for ‘Big Daddy’ Carney to save us.

What’s getting cut

Mark Carney talked a lot about balancing the operational budget during the election, but he never specifically defined it. During the leader’s debate, he did say:

“… we are looking at addressing an operational spend, which is about $150 billion. We will address that. We will make it more efficient and we'll do it in three years and we'll balance that budget.”

If we look at the numbers from the last federal budget, direct program expenses is split into two parts - ‘other transfer payments’ and ‘operating expenses’. You’ll note the more than $7 billion that has already been cut between 2023 and 2024, something the budget said would be accomplished primarily through attrition.

But 15% of the operating expenses line here is around $19 billion, smaller than what’s being reported in the media.

The Main Estimates lump together operating and capital in the same line, but it’s closer to the $150 billion number that Carney gave at the leader’s debate. The Main Estimates for the operating and capital line for 2025-26 is $143 billion, and 15% of that is $21.5 billion - exactly the number that the Toronto Star was given for the size of targeted cuts.

Clues to the way that these cuts are likely to be implemented can be found in the Liberal platform - it had lines about investing in new digital services, automating routine tasks and inquiries from the public, and amalgamating service delivery. The federal public service has already been looking into how to do this. It’s hard to believe that savings at this scale can be found this easily.

The mantra of this government is spend less so Canada can build more. This only makes sense if you don’t think what the federal government actually does is useful. The cuts are going to be deep and painful, and will unquestionably affect service delivery. After DRAP, it took forever for unemployed workers to be able to get through to someone to help them with their EI claims, for example. And that was a much smaller cut, planned over a longer timeline.

The hole in the budget comes from tax cuts

One of the first cuts that Carney made was to the promised increase in the capital gains inclusion rate. This cost the federal government an anticipated $19 billion in revenue over the next 5 years.

The next cut was a promise for a middle-class tax cut. The PBO says that the average taxpayer will get an extra $110 / year, and it will cost the federal government $28 billion over 5 years, in return. Even worse, though, David Macdonald at the CCPA shows how it disproportionately benefits the highest income earners.

Carney recently dropped the implementation of the Digital Services Tax in order to entice Trump into continued negotiations (which are going about as well as you’d expect - Trump just said Canada’s tariff rate is going up to 35% next month). That was expected to raise about $6 billion over the next 5 years.

Canada and the rest of the G7 have agreed to exempt US multi-nationals from the 15% minimum corporate tax rate they had negotiated as part of a multi-year deal at the OECD. Canada’s press release celebrated this “side-by-side” deal as a success, but what it really is, is a complete capitulation to Trump in favour of multinational corporations who will continue to shift their profits to low-tax jurisdictions. In 2019 it was estimated that Canada lost $4.5 billion each year from this kind of profit-shifting, and the global minimum corporate tax rate was supposed to put a big dent in that.

Assuming even a $1 billion / year loss from the change to the minimum corporate tax rate, and adding in the GST cut on new builds, we’ve got about $60 billion in foregone revenue over the next 5 years, compared to an estimated $100 billion cut in public services over the same time-period. It doesn’t have to be this way.

Slashing red-tape - the trifecta is complete

Two days after Champagne’s letters were discussed in the nation’s newspapers, Shafqat Ali, president of the Treasury Board, made an official announcement that he had asked each minister to review regulations and "propose actions and measures to eliminate red tape." Ministers have 60 days to report back. This whole process will be overseen by a newly created Red Tape Reduction Office. Because the economy needs us to dramatically reduce regulations as soon as possible. That’s what’s been holding us back.

I keep coming back to this quote from Grover Norquist in the US - "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub." Paul Martin took a stab at it in 1995, and Stephen Harper took up the cause in 2012. Mark Carney is here to finish the job.

None of this is surprising from a man who was a central banker for two different conservative governments, and worked as an executive for Brookfield. But it looks a whole lot more like a conservative government than most folks expected when they held their nose at the ballot box during the last election.