Federal budget will be a 'back to basics' document responding to the chaos in Europe, sources say

The upcoming federal budget likely to be unveiled in the first week of April will be a "back to basics" documentthat accounts for new economic and geopolitical uncertainties stemming from the crisis in Ukraine, senior government sources say.

"It will be different from last year's COVID measures budget. We're not in that space anymore. What are the core things government can and should be doing?" said one senior government official who spoke to CBC News on the condition they not be named because they are not authorized to speak publicly about the budget.

Describing this year's budget as "prudent," the official said that unless something significant changes, it would be surprising to see any of the COVIDbenefits and aid programs continue beyond their existing expiration dates.

But with global supply chain challenges and inflationary pressures posing a threat even before Russia invaded Ukraine, one source told CBC News thatfinance officials working on the budget have beenusingwords like "uncertainty" and "volatility" more than usual.

'We're not going to sugarcoat it'

The impact on the global economy of a new war in Europe with its collateralrefugee crisis, unprecedented sanctions on Russiaand soaring oil prices is certain to weigh on Canada's bottom line as well.

"On budget day, you'll see a sincere acknowledgement of the uncertainty we face. We're being practical. We're not going to sugarcoat it," said the senior government official.

That means the budget's projections for revenue, growth, deficits and inflationwill be best estimates that come with acaveat: it could all change ifcircumstances change.

The budget will account for recent new spending on humanitarian and military aid forUkraine, although some of that money came from existing departmental budgets. Still, it amounts to hundreds of millions of dollars.

There has been a great deal of speculation about whether the crisis in Ukraine will prompt Ottawa to boost defence spending in recognition of the fact that Canada's capacity to defend its own borders is not all it should be.

Last week, while she was in Germany a country with a decades-old tradition of non-interventionist foreign policy that recently announced a massive increase inmilitary spending Deputy Prime Minister and Finance Minister Chrystia Freeland hinted stronglythat Canada's own military spending is being re-evaluated.

"One of the reasons that I am here is because the geopolitical situation has changed tremendously and it is very important and valuable for me as we finalize the budget. Certainly, defence spending is something that we have to look at carefully," she said to reporters in Berlin, adding that Russia's invasion is a pivotal moment for both the world's security and its economies.

Experts say it would take tens of billions of dollars in new money to push Canada's military spending to NATO's target of two per cent ofGDP.

Still, another senior government source said that the Liberal government'soverall priorities remain the same.

"We've got two pillars. One is the goal of growth. The second is ensuring Canadians can access that growth," he said.

Health care cash with conditions?

So expect spending measures aimed at tackling housing affordability, fighting climate change and creating a modern and adaptable labour force.

And ifthe budgetoffers new money for health care something the provinces have been pushing for it will come withstrings attached, a second senior government source said.

"It will be outcome-based as it has been so far, such as when [it's] tied to hiring a certain number of doctors or nurses. Provinces will have to explain how they will spend the money to get the outcomes desired," the source said.

Experts warn that inflation no longer appears to be a temporary blip, andthe war is likely to make the problem worse.

"I would say that given inflation right now, given the war in Europe, 'do no harm' is really important. Don't add to the inflationary pressures," said Robert Asselin, a senior vice president of policy at the Business Council of Canada who once served as budget director to former minister of financeBill Morneau.

So far, the federal government has given no indication thatit plans toscale back the $100 billion over three years in stimulus spending announced in last year's budget.

The threat of stagflation

Asselin said it's a mistake to continue pumping billions of dollars into the economy when inflation is already three times higher than the Bank of Canada's target of two per cent.

"It's a bad move. It's not necessary. Even people inside government would tell you off the record that they recognize it is not needed. You just have to admit it and correct your error," he said.

Asselin said Canadians would understand if the government backed away from previously promised spending if the main goal of that spendingwas to stimulate the economy.

"Every dollar spent on something that is not needed, it's a dollar lost," he said.

Former parliamentary budget officer Kevin Page said one source ofworry is the prospect ofhighinflation coinciding with slow economic growth. Add to that the major supply shock in the energy sector because of sanctions on Russia and the outlook is not so good, he said.

"It looks more and more like we are headed to stagflation, I think," said Page, now president and CEO of the Institute for Fiscal Studies and Democracy at the University of Ottawa.

"I think we're headed into a really difficult time ... coming out of COVID and then getting hit with a major geopolitical shock."