Prime Minister

Mark Carney

has promised to deliver an “austerity and investment”

federal budget

next month, but the expected flood of red ink and daunting economic challenges facing the country have some wondering how he will thread the needle between the two competing goals.

“Austerity may be a stretch,” said Randall Bartlett, deputy chief economist at Desjardins Group. “When you’re running enormous

budget deficits

, some of the largest deficits the country has seen outside of a

recession

, I think it’s going to be very difficult to call this an austerity budget.”

Ottawa is expected to deliver a record-breaking overall deficit, with spending increases on infrastructure and defence, funded partially through cuts from operational government spending.

The precise estimate for this year’s deficit vary, but the Bank of Montreal is forecasting it could be as high as $80 billion.

The ballooning deficits will be driven by a combination of factors hitting both the income and expenditure sides of the ledger, economist say, with the cancellation of the digital services tax and the end of

retaliatory tariffs

on U.S. goods expected to dent revenues. At the same time, Carney has made several new spending promises, including billions in support for sectors of the economy hurt by the trade war with the United States, which has also put Canadian economic growth on a negative trajectory.

“After grinding through the recent announcements, it wouldn’t be surprising to see the deficit jump toward $80 billion, or 2.5 per cent of GDP, versus $48 billion last estimated for fiscal year 2024-25,” BMO senior economist Robert Kavcic said in a note.

Carney has said there will be a different approach to the October federal budget, with operational and capital expenditures separated into two different budget categories. While capital spending has not been defined, Carney has indicated it will include the investments in defence and public infrastructure, including incentives that will spur private investment in the Canadian economy.

When it comes to the austerity side of the equation, Carney has asked government departments to find 15 per cent of savings in the next three years, in an effort to fulfill his election promise to balance the operating budget by 2028-2029.

Finance Minister François-Philippe Champagne said last week there will be “adjustments” to the federal public service to meet that operational savings goal. The number of people employed in the federal public sector has increased by 100,000 in the last 10 years.

But critics argue that the cuts will not be enough to offset what is looking more and more like a structural deficit, a permanent imbalance between the government’s expenditures and revenues.

Bartlett said he expects the deficit to hit $70 billion in the 2025-2026 fiscal year, before falling to $60 billion the following year and stabilizing at the $40-45 billion range from 2030 onward.

“Regardless of what the spending is being used for, these are large structural deficits that the federal government has telegraphed to date that it plans on running if it follows through the plans that it has put forth so far, including the saving measures it has suggested,” Bartlett said.

Canada’s program spending has entered austerity periods before, most notably under prime minister Jean Chretien and finance minister Paul Martin in the mid-1990s and under prime minister Stephen Harper after the 2008 financial crisis, when he pursued a “Deficit Reduction Action Plan.”

Kevin Page, chief executive of the Institute of Fiscal Studies and Democracy, said the spending cuts highlighted by Carney seem to be akin to the cuts proposed by Harper, who along with then finance minister Jim Flaherty was able to balance the budget by 2014-2015 through reduced investments to programs and federal public service job cuts.

“If the government maintains a commitment to balance the operating budget in 2028-29 and shows tangible progress in boosting defence spending toward 3.5 per cent of GDP (each percentage point worth about $30 billion annually) then the size of the spending cuts for reallocation will be much larger than that implemented by prime minister Harper,” Page said.

Former Bank of Canada governor David Dodge said Carney will have to address the extent of the cuts and their impact on public services, when the budget is released next month.

“Basically the government’s fiscal stance is support for investment will crowd out delivery of services or transfers to citizens, that’s a tough message,” said Dodge. “He’s (Carney) going to have to come clean, that this means in the short-run some pain for most of us.”

Carney has committed to not cutting transfers for healthcare, education and individuals. However, Dodge said program review under the Chretien austerity period did see cuts in transfers.

“(Carney) cannot avoid it,” he said. “We certainly couldn’t avoid it in 1995, we had to trim spending everywhere, including transfers to provinces.”

Compounding Carney’s problems is the trade war with Canada’s largest trading partner, a factor that did not exist under Chretien and Harper.

“Mr. Carney faces a much more serious problem than Mr. Chretien did in 1994-1995,” said Dodge. “The situation we faced then was simply a fiscal problem, but Mr. Chretien had a lot of things going in terms of favourable conditions worldwide than Mr. Carney does.”

Bartlett said questions also remain about oversight of the budget’s new framework by the newly-appointed interim parliamentary budget officer or the auditor-general. In a report released in June, the former parliamentary budget officer Yves Giroux said it was difficult to determine if the federal government was meeting its fiscal targets because the Liberals’ new budget benchmarks and streams had not been defined.

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“That to me leaves a lot of scope for really categorizing things in a way that potentially look more positive from a budgeting perspective, and lacks transparency potentially,” he said.

• Email: jgowling@postmedia.com