The Canadian Bitcoiners Podcast - Bitcoin News With a Canadian Spin - Canada's Surprising Liberal Budget Proposal - CBP Quick Currents

Starting point is 00:00:00 Welcome back everybody to another CBP quick current. I'll level with you. I started preparing this before Carney's liberal government decided they weren't going to release a budget this year. Look, by my count, there will not have been a proper budget now for more than a year and a half by the time one is released. You can make the case it's actually two years. You'll remember that

Starting point is 00:00:30 the fall economic statement last year was late and dodged basically by sitting MPs. So you may find that this is a rather timely podcast episode because today we're talking about the Canadian split budget proposal. You've heard Mark Carney discuss how he wants to balance the operational budget while, what is the generous term here, I guess not balance the investment budget. Stuff that, you know, his government and he himself thinks will create jobs and build a better Canada. I'm not necessarily disagreeing with that by the way. What I think I have an issue with is thinks we'll create jobs and build a better Canada.

Starting point is 00:01:05 I'm not necessarily disagreeing with that, by the way. What I think I have an issue with is whether or not there should be an attempt to balance both. The common refrain on Twitter is obviously that if you have a credit card statement or bill and try and convince the credit card company that you only need to pay the operational side while the investment side should be unchallenged. You may find that you have a bad time. Your mileage may vary with that, but I suspect that you'd get a call. Anyway, we'll get into all that. First, let's just do the sponsors. EZDNS. Mark is our favorite neighborhood registrar. He's the best place for you to buy or port a domain and has a ton of features available, whether it's Domain Share or EZmail,

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Starting point is 00:03:10 Even though the price is over 100K. Anyway, so let's get into the podcast. Today we're gonna talk about a bold proposal from Canada's new Prime Minister, Mark Carney, and his Liberal government, a split budgeting method that separates operating and investment budgets. This idea sparked a heated debate with some calling it a bit of a game changer and others warning of its fiscal risks.

Starting point is 00:03:34 We'll break it down. We have some data, some examples, and we'll try and put a little context around it as far as other countries that have done it and some of the risks and rewards and what it means for Canada's economy. The proposal itself, tabled in April 2025, is a fiscal strategy aimed at transforming how Canada manages its federal budget. The core idea is to split the budget into two distinct streams, an operating budget for day-to-day expenses and an investment budget for long-term

Starting point is 00:04:05 growth-oriented projects. According to Carney, this approach will save taxpayer dollars through tighter fiscal management while boosting economic growth. The Liberals have promised about $130 billion in new spending over four years, with no set timeline for balancing the overall budget. Critics like the Fraser Institute point out that this comes on the heels of a projected 1.1 trillion borrowing spree under the previous Trudeau government. The current government plans to increase the 2025 deficit from 42 billion to 62 billion to fund this vision. But what exactly does the split budget method

Starting point is 00:04:40 entail? Well, let's see. To understand the method, we have to clarify the difference between operating and investment budgets. This operating budget side covers recurring expenses like public sector salaries, health care funding, pension payments. We've talked about that in the past. For example, in 2024, Canada's federal operating expenses could be said to have included $180 billion for health care transfers and $50 billion for public servant wages. These are the costs of keeping the government running day to day. The investment budget, on the other hand, focuses on capital projects that drive growth.

Starting point is 00:05:16 Think infrastructure like high-speed rail. We don't have any green energy projects. We may have too many. Or housing initiatives. A Canadian example is the $10 billion investment in the Canada Housing Plan to build 3.9 million homes by 2031. I know we've heard this before, hold your tomatoes, I'm just saying what they would say, trying to be impartial. The Carney Plan emphasizes balancing the operating budget within a few years while allowing the

Starting point is 00:05:41 investment budget to run deficits funded by borrowing or targeted revenue. The split aims to ensure everyday expenses don't spiral out of control while freeing up capital for projects that could boost GDP. It's obviously not without controversy and we will talk about why. What are the upsides and downsides here? We'll start with the pros. First, the Liberal government would say that this has the potential to increase transparency. By separating operating and investment budgets, Canadians can see exactly where their tax dollars are going. And they could say, are we overspending on bureaucracy or investing in future growth? It's easier to tell.

Starting point is 00:06:18 Second, it prioritizes long-term growth. Infrastructure and green tech investments could increase productivity. It's possible, potentially raising Canada's GDP growth rate, which is important, which has lagged at 1.2% annually since 2020. Third, it aligns with modern fiscal thinking. Carney is a former Bank of Canada governor and argues that low interest rates historically justified borrowing for productive investments, though rates are higher now, obviously, at about four and a quarter percent. The risks are many.

Starting point is 00:06:48 Critics including the Fraser Institute, like I mentioned, warned the split could mask reckless spending. The $130 billion investment pledge lacks a clear timeline for balancing the overall budget, raising fears of runaway deficits. We already have them, but they could get worse. In 2025, Canada's debt to GDP ratio is already a staggering 42 percent, and more borrowing could push it higher, which would increase interest costs. Last year, Canada spent 47 billion on debt servicing alone,

Starting point is 00:07:16 more than the entire defense budget, obviously. I think we're approaching the health care budget as a total now. Another concern is accountability. And investment budgets can be politicized with funds funneled to pet projects rather than high return initiatives. Finally, there's a risk of economic shocks. If global rates rise or trade tensions with the U.S. worsen, Canada's borrowing costs could spike, squeezing both budgets. This is a high-stakes gamble, but we should look and see if it's worked elsewhere. Several countries have experimented with split budget systems.

Starting point is 00:07:47 They've had mixed results. We can look at two that are close-ish to us, Sweden and New Zealand. In Sweden, since the 1990s, they've used a split budget framework, which has prioritized a balanced operating budget while allowing borrowing for investments like infrastructure and education, similar to what is being proposed here. This discipline helped Sweden recover from the 90s banking crisis, reducing its debt to GDP from 70% in 1995 to 31% by 2024. Economic growth averaged about 2.5% annually and the Swedish krone remained stable.

Starting point is 00:08:18 However, Sweden's success relied on strict fiscal rules and a culture of transparency which Canada may struggle to replicate given recent political spending sprees. In New Zealand they adopted a similar approach in the 2000s splitting their budgets to fund health care and infrastructure while capping operating budgets. It worked initially growth hit 3% annually and the Kiwi dollar strengthened but during the 2008 financial crisis heavy investment borrowing pushed deficits to 8% of GDP, forcing austerity measures. By 2024, New Zealand said that the GDP was 38%, lower than Canada's, but cost of living

Starting point is 00:08:52 pressures persisted due to reliance on exports and global commodity prices. These two cases show that split budgets can foster growth and stability, but require discipline to avoid over-leveraging. In Canada's case, there's unique challenges like trade dependence on the US. This could complicate things, so we have to ask, is Canada ready for this? Our economic context will determine whether Carney's plan succeeds. If we want to talk about readiness, on the plus side, Canada has a strong starting point. We have a very strong credit rating, for what that's worth, which allows borrowing at

Starting point is 00:09:24 favoured rates, despite recent hikes and interest rates The Bank of Canada's four and a quarter policy rate in May is manageable and inflation is cool to 2.1 percent You can say what you like about those metrics But it has given some financial or excuse me fiscal wiggle room to Canada Carney's expertise as a former central banker could also instill investor confidence. This could potentially stabilize markets, of course, but there are red flags. Canada's productivity growth is stagnant. 0.3% annually since 2015. Incredibly low, almost impossibly low, given the comments from our leaders. This is limiting the tax base in

Starting point is 00:10:03 terms of its ability to service new debt. Housing affordability is a crisis with the average home price is around 700,000 and investment spending must deliver tangible returns to ease public frustrations. Plus, there's trade risks. These relationships with the United States, our relationship with the US has never been more precarious, at least on paper. With 75% of exports going to the US, any new tariffs would shrink GDP by 1-2% basically overnight, straining both budgets.

Starting point is 00:10:29 Canada's ability to enforce fiscal discipline like Sweden did is also questionable given recent deficit trends. In short, Canada has the tools but needs laser-focused execution. We can talk about the broader impacts as well. How will a split-budget approach affect Canada's economy? Canadian dollar, we could start there. Increased borrowing could pressure the CAD, especially if deficits grow unchecked. In 2024, the Canadian dollar traded at about 73 cents US, though it's a touch lower now,

Starting point is 00:11:00 I believe. Heavy investment spending might weaken it further, raising import costs for goods like food and fuel. We've talked about this. Canada is a nation of importers, not one of producers. And because of all the people on fixed income, this could have a significant impact. Heavy investment spending might weaken it further, raising import costs for goods like food and fuel. However, growth from successful investments could strengthen the CAD long-term. There's always a silver lining. In terms of the cost of living, short term, 130 billion in spending could stimulate jobs

Starting point is 00:11:28 and wages, which would ease some pressure. But if borrowing fuels inflation, prices for essentials, which are already up 20% since 2020, could climb even further. Housing investments must deliver fast to curb rent and mortgage costs. Then on the long term debt side, the $62.3 billion deficit in 2025 pushes federal debt toward $1.3 trillion. Without high return investments, debt servicing can hit $60 billion by 2030, crowding out basically every other priority.

Starting point is 00:11:57 2030 used to feel like it was a long ways away. It's only about four and a half years now, so keep that in mind as well. A disciplined operating budget is critical to offset this. Then on the interest rate side, the Bank of Canada could raise rates if deficit spark inflation or weaken the CAD. A 0.5% hike could add 10 billion to debt costs. On the other side of things, successful investments could boost growth, allowing rates to stabilize.

Starting point is 00:12:21 Then there's our economic health. If investments in infrastructure and green tech actually raise productivity, GDP growth could hit 2% annually pretty quickly, which would improve living standards. But failure to control the deficits or external shocks like US tariffs and other stuff that we just don't control could tip Canada into recession. And with unemployment rising already, it could rise even further from 6.5% to 8%. The outcome really does hinge on execution, but it's also at the mercy of global economic conditions. Carney's split budget proposal is a big bet on Canada's future. To be honest with you, it's one we might need to take given the current state of affairs.

Starting point is 00:13:04 By separating operating and investment budgets, it aims to balance fiscal discipline with growth-oriented spending. The pros, transparency and long-term gains are compelling if they are well executed. But the risks of runaway deficits and economic shocks are real and amplified in today's global economic picture. Examples like Sweden show it can work, but Canada's readiness is uncertain given productivity woes and trade vulnerabilities. The impacts on the Canadian dollar, cost of living, debt, and economic health will depend on disciplined execution and on favorable

Starting point is 00:13:36 external factors. As Canadians, you should be watching closely. We're going to find out how this works because he's going to do it and we're just going to be along for the ride. If you have thoughts, comments, questions on the nature of this, what is really a first-time policy position for a sitting government here in Canada, I want to hear about them. Put them in the comments on Spotify in the podcast area or come to the live show on Monday night on our YouTube channel and we'll talk about it some more. We live in interesting times friends and as always I wish everybody the best.

Starting point is 00:14:11 We'll talk to you soon.

The Canadian Bitcoiners Podcast - Bitcoin News With a Canadian Spin - Canada's Surprising Liberal Budget Proposal - CBP Quick Currents

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