The Munk Debates Podcast - An uninspiring budget and Carney's government inches closer to a majority

Episode Date: November 6, 2025

To listen to the full episode consider becoming a donor to the Munk Debates for as little as $25 annually, or $.50 per episode. Canadian donors receive a charitable tax receipt. After weeks of hype Mark Carney's government presented a disappointing traditional Liberal big spending budget. While there are incremental measures to promote economic growth, they are not in the order of what this country needs, and in a few years we are going to be borrowing money just to pay the interest on our debt. Andrew offers a charitable take: we are in an immediate crisis, and Mark Carney decided to implement an interventionist budget in the short term to ride out the Trump craziness. Regardless, this was a missed opportunity to introduce radical tax and competition reform that is badly needed to jumpstart our economy. In the second half of the show Rudyard and Andrew assess the political fallout from the budget, specifically a Conservative MP crossing the floor to the Liberals and rumours that others are set to follow suit. Could Mark Carney soon have a majority government? And why are MPs not talking to their constituents before crossing party lines?Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

When you take the sum total of it, it looks a lot like a pretty traditional big spending liberal budget. Not horrifically so, not going bankrupt tomorrow. But it's an accomplishment of a kind to be spending more than the Trudeau liberals in their latest incarnation. Welcome to the Monk Dialogues with Andrew Coyne. I'm Roger Griffiths, Chair of the Monk Debates. Andrew, we got you on a big day, hot off the budget lockup, a great column that you wrote in the last 24 hours. You and I had been talking about this budget on a number of our programs leading up to yesterday. Your verdict, sir, what did you see and does it, in the words of the prime minister and his government, meet the moment?

Well, it's a bit of a damp squib. I don't think it's only that they'd raised expectations so high, though they certainly had. I've never heard such hype in advance of a budget. You know, it was going to be transformative of this and generational that and swinging for the fences and defences and defunding. finding a century. At the same time, we were also told, oh, there's going to be a lot of sacrifices and difficult choices. And there would reason to believe that it was going to be a big budget, because we're in big times. You know, we've got terrible trouble with our growth and productivity. Even before Donald Trump came along, but then we have the whole thing with the Trump tariffs,

and how do we ensure that people still will want to invest here in Canada in the light of that. So there was reason to expect it was going to be a significant budget. And it just really isn't. It's not a bad budget in the sense that there's not a lot of really wrongheaded things in it. There's some good things in it. But when you take the sum total of it, it looks a lot like a pretty traditional big spending liberal budget. Not horrifically so, not going bankrupt tomorrow. But it's an accomplishment of a kind to be spending more than the Trudeau liberals in their latest incarnation. To be spending more, to be borrowing more, the deficit's going to be twice the size of the liberals.

Okay, but supposedly there was going to be a big shift away from spending on current consumption and more on investment that would yield higher living standards, higher growth in the economy, higher revenues for the government. Well, when you look at that shift, it's not really that large. That expenditure review that went into that was much Ballyhood beforehand. It turns out to, in year three, they think they can take $13 billion out of operational spending of about $500. billion. So 2% of operational spending. It's hard to take it seriously. I mean, this is in a long, the latest in a long line. We're always told about these big program reviews as if the problem was we're spending too much on paper clips. You know, we've got to economize on, you know, sort of office supplies kind of thing. And it's not if we're going to make any serious shift in spending.

I mean, the idea is not unsound of, you know, the mantra of spend less to invest more was not a dumb or contradictory idea. But just the realization of it just seems to have left a lot. So if you're spending a fair bit more on capital and you're not cutting on operational spending, then you're spending more in total and you're going to have to borrow more to cover it.

So that's one sort of set of things that's disappointing. The other is on the growth side. The measures in here to promote economic growth are kind of incremental. They're mostly in the right direction. You know, I think a lot of people thought, okay, we really need to jumpstart investment in this country. It's been very low level of investment. We're not even replacing capital now as it depreciates and gets worn out. So just sort of

tweaking around the edges of more accelerated depreciation, more expensing in first year kind of thing. It probably helps, but it's just not on the order of what we need. So the government had this graph where it shows that the marginal effective tax rate of investment on Canada's, in Canada will be lower than in other G7 countries. about four points lower than the United States. In normal times, you might say, well, that's good. When the President of the United States is slapping on 25% tariffs, I think you need something a little bit more dramatic than that.

And what do you think happened, Andrew? Why this slip between cup and lip, between the lofty rhetoric and the reality of the budget? And I guess my question is, was that a tactical decision, a political decision? Or is it, in a sense, a reflection of the, not simply a style of government, but a theory of government and an approach that if one is committed to state-led economic leadership, then a whole bunch of other things, if not off the table, are certainly less preferential than the types of things we have seen in this budget,

which do seem to be overly focused on, you know, wise men and women in Ottawa, picking preferential sectors, pricking preferential. tax rates and capital structures and then applying these in a very precise and technocratic fashion across the economy to achieve, we hope, many years from now, a return on that investment, which would justify the fact that this is all borrowed money. And I was surprised. I mean, the shocker number in me was that by 2029, so the end of the budget projection, interest payments on the debt will be larger than the deficit was. That's right.

Announced this year. And that's just interest payments. So we'll be borrowing basically to pay the interest on the debt. A more positive way of saying that is they'll have achieved an operating surplus, as it used to be defined. You know, more revenues will outpace program spending. But it's not a good situation. It's better than if you're actually adding to the debt, even just by a deficit on operations. But it's not great.

I have three possible theories on it. The most charitable one is, look, we're in an immediate cost. crisis where the President of the United States is picking off one industry after another with these targeted tariffs. We have to deal with that emergency first, and that you might argue, I'm not saying this is necessarily the right idea, but it's not a crazy idea to say, we've got to do things that are interventionist in the short term to protect those industries while we ride out the Trump craziness. That's a plausible argument. A last charitable interpretation is this is what they would be doing anyway because that's how they think about the economy,

and they just don't get what you or I might agree was the more pressing. priority, which is to unleash private investment and stop trying to pick winners, et cetera. And so that's certainly possible as well. And then the third would be, this is all about politics, that they have a minority government. They don't feel they're in a position to do anything too dramatically bold in that regard. They can't afford to make too many enemies. So let's focus the budget on playing reasonably safe with the spending of taxes, but doing a lot of stuff that is quite pleasing to center right voters. So there's a lot of the things in this budget, not all of them are new, but but they're consolidating this direction of dialing back on some of the climate change stuff,

dialing back on immigration a little bit, you know, two or three other things that would be pleasing to centrist, center-right voters are not going to lose them many votes and position themselves for the fight to come when they hope to get their majority. So some combination of one or all of those possibilities, but I don't know exactly. And, as you say, not the kind of steeper funding cuts that we might have imagined that would have really alienated or annoyed the progressive wing of the party, all of the NDP voters that voted liberal in the spring. So a bit of a Goldilocks budget maybe to look at it that way in terms of pleasing these different constituencies, not all of them all the time, but some of them

and some of the time. And it depends on your analysis of how serious the fiscal situation is. So if your benchmark is, well, this isn't 1995. You know, we're not in the situation that they were in 1995. Well, you're absolutely right. And you're not going to take the kinds of measures that they took in the 95 budget. So the spending cuts here are dwarfed by the spending cuts in the 95 budget. But because in 95, we were spending 36 cents of every tax dollar and interest in the debt. But before there was 1995, as my friend Stephen Gordon says, there was 1975. And a lot of the stuff that was done in those years kind of laid down the track that made it very hard to extricate ourselves when bad stuff happened and our fiscal forecasts were thrown out. And lo and behold, we went from 20% debt to GDP

in 1975 to 65% debt to GDP by 1985, you know, 1995, I guess. But, you know, the track was laid down. That's the point is there's a lot more they could have done in this budget to kind of make sure we never get on that track, to give us more of a comfortable margin of error. People say, oh, look, you know, he's cut as much as Stephen Harper's program review did, which A tells you how weak the Stephen Harper program review was. But B, there's a lot more low-hanging fruit after 10 years of Justin Trudeau ramping up spending very rapidly. Presumably it would be easier to make equivalent cuts to what Stephen Harper did under current management, and they didn't. Do you think, Andrew, that part of this is that the economy is slowing, and there's an element of a kind of countercyclical pump prime here that, and just the reality is that when you run,

$40 billion, $50 billion deficits in good times, when things do slow down, a $40, $50 billion deficit isn't pump-priming because that's the status quo. Do you think there might be a case for this budget that we are facing real economic weakness? Are there policies in this budget that you think in the shorter term? Because I guess that's what I struggled a bit coming away from it was a sense of what this is actually going to do demonstrably for the economy in the next 6, 12 to 18 months. to their credit, a lot of these investments, whether they play out. And again, it depends on a lot of foresight here to see trends in industries and technologies, but they're going to make those bets.

And if they're right about them, they will pay out. But what about the shorter term as unemployment increases, as companies exit the United States to the United States because of tariffs? Is it right to think that this budget, I don't know, has postponed those types of decisions as to what and how we might respond if we are heading into a sharper economic downturn? I don't think that would be well advised. This is a supply shock, not a demand shock, the tariff that the United States has put on. It is cut back on our productive capacity. The answer to a supply shock is never a good idea to respond with demand stimulus.

We learned that less than the 1970s. So, no, I think the answer to what the Americans were doing is to double-downs, on increasing our productive capacity. I shouldn't say double down because we haven't even placed very large bets in the first place. So, as I say, making the Canadian economy such an attractive place to invest that even in the teeth of 25% tariffs, people would still choose to locate here. But that's not how, I don't think you make that case today after this budget. No, I mean, there's a lot of funding for municipalities. Great.

I'm glad municipalities are going to build highways and sewers and public transport. But that really doesn't, in the fundamental period of the next. 12 to 18 to 24 months, reset international investors, Canadians' investors' sense of this economy and it's potential. Exactly. So the capital versus operating spending distinction is mostly in this budget, just a matter of renaming stuff. It's not an invalid distinction in principle.

But if you're going to make that distinction and say it's different to be borrowing for this stuff than it is for the other stuff, then the capital spending, first of all has to genuinely be capital spending. probably it's more so the case with this budget than in previous budgets where the liberals renamed stuff to be capital spending. So probably fair enough there. But even then, it's got to be capital spending that actually increases the productive capacity of the economy. Spending a lot in the military, which is necessary and appropriate and long overdue is absolutely a valid idea.

But you're not, you know, I know people like to make claims for military spending as having kind of a double payoff. It almost never is the case. Spending a lot more on housing, probably be necessary, but that's not going to increase the productive capacity of the economy. So that's the danger here is you just wind up producing a pretty conventional big spending budget that runs deficits that you're not going to be able to, you're going to have difficulty paying off. One indicator of that is, and to come back to something we're talking about earlier, debt service costs, interest costs on the debt as a proportion of revenues, which is one of those indicators that you want to watch, is now going to be up, gone from six cents in the

dollar a couple years ago to 13 cents in the dollar. Is that the dollar? Is that the cost of that five alarm fire? No, as I say, at one point we're at 36 cents, but the trend is not good. And it shows you, in a way, that they themselves don't think there's going to be some huge revenue payoff that will cover the increased cost of interest on the debt, because, you know, we're going to be spending now $76 billion per year on interest in the debt just in four years from now. That is, it's dangerous. Yeah. Just finally, before we switch to all the politics that are now happening around the budget, what do you think this says about the Kearney government going forward?

Is this how we should expect their theory of the case to be presented from now into the five-year frame of this budget? Do you sense, like, if there was an economic slowdown, that the plans in this budget could or might be replaced with a different set of economic responses that were much more targeted, specifically to their own growth projections of the budget exceedingly low, paltry growth, partly because immigration also is coming down quickly. I guess what I'm trying to get at is how flexible or inventive do you sense this group in Ottawa is right now? Are they fixed on these ideas that they've expressed in the budget? Or is this just simply a snapshot in time that may give way to a very different theory

in a very different set of circumstances? Well, and as usual, the answer is I don't know. But the optimistic scenario is this is the 94 budget that preceded the 95 budget. The 94 budget was a bit of a damp squib again. It didn't really wrestle with the size of the deficit challenge we were facing that. But at least pointed in the right direction. It was just too many baby steps rather than the kind of giant strides that were needed. The emphasis in this budget on investment is a good one.

We do need to be building things, and we do need to be emphasizing production and not consumption. Those things are good. So the rhetoric in many cases is to the good. It just didn't follow through. To be fair to Carney, he's only been in for six months, and he's in a minority government situation. So, you know, if you wanted to be charitable, you would say, let's wait and see what the next budget brings. And if there's some deeper confirmation of a trend, if they get a majority or if they get another government, you know, maybe we'll see a clearer trend. And if it becomes clearer how severe the fix we're in is and becomes clearer to everybody

that incremental steps are not going to cut it, then I think you can draw further conclusions at that point. If they produce another one of these budgets, then you'd really say they just don't get it. So I'm trying to be a little bit shared. Well, it's hard to know at this point exactly what they're thinking is, but you could understand, if not excuse, some political caution at this stage in their mandate. But what about an economic precautionary principle as well as a political one? Because the future is so uncertain.

There's so much happening with the U.S. relationship, China, with an uncertain geopolitical environment, that is this the time to be investing on the scale that they are investing, given that the future is so uncertain? Some would say that's absolutely the reason to invest. I don't know, though. I would sense that maybe the future is. unknowable and there's some humility in that and that you want to have dry powder so that if there isn't an economic turnout if the relationship with the United States worsens you have

optionality this budget in the size of its borrowing and we'll see how capital markets respond to that the dollar was weaker today seems to take a lot of a bit of that optionality away and kind of lock us into this more du regis state-led economic theory of development that maybe is giving us the more European-style approach that Mark Carney seems to favor in all things economic and otherwise. I would certainly prefer that they had been more cautious on the borrowing front, more fiscally conservative, and more risk-taking on the get investment going. It's not just a matter of the direct effects of the policy themselves, but I think there

needs to be much more radical tax reform that sometimes both parties have hinted at but haven't really unveiled much, but much more radical tax reform in particular, much more radical pro-competition reforms. There's things in here about the banking sector and the telecom sector, you know, and they'll help some people, but they're not going to really move the needle on that. So they need to be, needed to be much more radical. And I agree, now is as good a time as any, if not the best time. And the point it's going to make is it's not just what the direct effect about the policies, it's also the signaling effect. You know, there's a lot of people around the world looking at Canada. And, yeah,

they're going to do the intense number crunching around any particular investment. But the first thing it is get their intention. And big, bold policies can have that effect of not just that there's substantive things, but of just sort of saying Canada's open for business. Yeah. Ireland was the classic example after the great financial crisis. I really do think we're in the situation now where we need to be sending those signals. Yeah. Let's say goodbye, Andrew, to our complimentary listeners and viewers, take a short break, come back on the other side and talk some big political fallout. One floor crosser has moved from the conservatives over the liberals.

As we tape now, rumors that more could be following. Is floor crossing a good idea? Is this pumping in our democracy that we should be celebrating or not? And what would it mean if Mark Carney suddenly had a majority by this time next week? Back after the short break. Thank you for listening to the first half of this monk dialogue with Andrew Coyne. To access the full episode, consider becoming a monk donor. For just $25 a year, you get a month.

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