One Comment About Taxation – Why You Should Be Concerned About The Federal Government’s Deceptive Budgeting Exercise of Separating the Operating Budget From the Capital Budget

Picture a couple at the kitchen table reviewing the family budget. Their paycheques don’t cover their spending, so they’ve been topping up the difference on a home equity line of credit. Then one of them has an idea: split the budget in two. The mortgage payments and the new roof go into an “investment” column. So do the groceries. After all, well-fed kids grow up to be productive adults. Move enough items and the “everyday” budget balances. Problem solved!

 

Except the line of credit keeps growing, and the bank still wants its interest.

 

A financially literate household would never do that. Yet the federal government has been asking Canadians to accept the same logic for eighteen months now, and the Parliamentary Budget Officer (PBO) has, once again, shown just how easy the trick is to pull off.

 

Since the 2025 budget, the federal government has split its books into an “operating budget” and a “capital budget,” and made balancing the “operating budget” by 2028-29 one of its key fiscal anchors. It’s a tired old accounting trick.

 

On September 15, Prime Minister Mark Carney told the Canada Investment Summit the government is “on track to balance the operating budget next year, one year ahead of schedule.”

 

Nine days later, the PBO released a report concluding the operating budget won’t “balance” until 2029-30, missing the target by about $500 million in 2028-29, a rounding error on more than $500 billion of annual operating spending. The government could close that gap by cutting $500 million of day-to-day spending or simply relabelling it as “capital.” The PBO put it plainly: “Classifying even a modest amount of spending as capital rather than operating, without any actual change in fiscal policy, may have been relevant to balance the initial operating budget fiscal track.”

 

When you control the definition, you control the date. As I’ve often said, “Why wait three years to achieve the fiscal anchor? Just move enough day-to-day expenditures to the “capital budget” to have the “operating budget” balanced and, voila! Fiscal anchor achieved!”

 

The ridiculously broad definition of capital makes this possible. The Department of Finance defines capital investment as “any government expense or tax expenditure that contributes to public or private sector capital formation.” Under that definition, the Agricultural Clean Technology program is capital, while Agricultural Climate Solutions is operating, even though both support farm-level investment. Huh?

 

Last November, the PBO calculated that “capital investment” was overstated by about $94 billion compared with international practice. That’s the groceries filed as “investment.” Film tax credits, investment tax credits, corporate tax expenditures and production subsidies all count as capital, even though the PBO notes none would be treated that way under international standards or in the United Kingdom, the government’s favourite comparator.

 

The U.K. at least pairs its operating/capital split with a debt rule: net financial debt must be falling as a share of the economy by 2029-30. Canada has no such limit.  The 2025 budget retired the debt-to-GDP anchor and, as the PBO notes, “there is not a similar constraint on total debt accumulation.“A spokesperson for Finance Minister François-Philippe Champagne nonetheless called the focus on operating spending a “stricter guardrail” than debt ratios.

 

Hardly. A guardrail the driver can move isn’t a guardrail.

 

Defenders of this deceptive policy will point out that businesses split operating and capital budgets all the time. True. But a business capitalizes assets that generate the revenue to repay what it borrowed. Governments don’t. Whether borrowed money pays for a bridge or a bureaucrat’s salary, taxpayers ultimately repay it. Debt is debt is debt.

 

Why should this bookkeeping debate matter to your personal finances? Because relabelling doesn’t change a single dollar that has to be borrowed and debt comes with interest costs.

 

According to the Spring Economic Update, public debt charges will be $58.7 billion this fiscal year, more than the $53.4 billion the government expects to collect from the GST. Every dollar of GST Canadians pay, and then some, goes to interest before funding a single nurse, soldier or road. Spread across roughly 41.8 million Canadians, that’s about $1,400 per person, or about $5,600 for a family of four. And it’s growing: debt charges are projected to hit $80.9 billion by 2030-31, a 38 per cent jump.

 

Interest is the least productive spending a government does. And it gets paid in one of three ways: higher taxes, fewer services, or more borrowing that pushes the bill onto our children and grandchildren. Usually, it’s some combination of all three.

 

Is the increased debt going to investment? Nope. Since the 2025 budget, better-than-expected forecasts handed the government an extra $18.5 billion over five years. But it announced $173.3 billion in new measures, $126.8 billion of it day-to-day spending. The PBO calls that “the government’s own policy choices.” So much for “spend less to invest more.”

 

There’s a quieter cost, too. Most of us learned the basics at our own kitchen tables: spend less than you earn, and don’t pretend a debt isn’t a debt. Governments should model those habits, not teach Canadians that a deficit disappears if you rename it. “Balanced” should mean balanced. Blurring that word makes the public worse at judging fiscal health. That is the opposite of financial literacy.

 

So when the fall budget lands, ask one question: how much of any “improvement” in the operating budget comes from actual spending restraint, and how much from programs migrating to the capital column or a definition that quietly got wider? If the government can’t show that reconciliation, you have your answer. Bondholders and credit rating agencies will be watching the total deficit and the debt. You should too.

 

Back at the kitchen table, the couple can call the groceries an investment if they like. The bank won’t care. It will send the interest bill all the same, and if they don’t pay it, their kids eventually will.

 

One Comment About Leadership – Good Leaders Have Real Guardrails

 

As I stated above in the tax section, a guardrail the driver can move isn’t a guardrail. That message applies well beyond government and its deceptive budgeting practice. 

 

Here’s the pattern. A leader sets a target. The target is public, so missing it would be embarrassing. And the leader, or the team reporting to the leader, also controls how the target is measured. Guess what happens? The target gets hit! Every time! And it means nothing.

 

There’s a name for this. It’s called Goodhart’s Law. In 1975, British economist Charles Goodhart observed that any statistical regularity tends to collapse once pressure is placed on it for control purposes. Anthropologist Marilyn Strathern later put it more memorably: “When a measure becomes a target, it ceases to be a good measure.”

 

You’ve seen it. The sales team that tries to book revenue early to make the quarterly goal. The project that’s “on schedule” because the schedule was quietly rewritten. The department that shrinks its backlog by redefining what counts as backlog.

 

The fix isn’t more targets. It’s separating the person being measured from the person keeping score. Public companies have auditors. Boards have independent directors. Private business owners can use a peer advisory group, an outside accountant or a trusted adviser with permission to say, “That number doesn’t mean what you think it means.”

 

The hard part is wanting that. Most of us like grading our own work. But a leader who hands someone else the ruler sends a powerful message: I’d rather know the truth than look good.

 

Leaders – set the guardrail. Then give someone else the keys to it. Real guardrails constrain the person driving. If the driver gets to move them, they’re decoration.

 

One Comment About Economics / Politics  – The Government of Canada Should Have a Real Guardrail With Respect To Its Deceptive Split of the Federal Budget. At a Minimum, Hand the Definition of Capital Over to an Independent Body

 

Every fiscal watchdog has the same job description: keep score when the people being scored would rather you didn’t. And every government, eventually, tires of it.

 

Canada’s Parliamentary Budget Officer (PBO) was created by the Harper government’s Federal Accountability Act in 2006, in response to criticism of the accuracy and credibility of federal fiscal projections. The first PBO, Kevin Page, then spent much of his five-year term clashing with the very government that created the office. In 2017, the Trudeau government made the PBO an independent officer of Parliament. Different parties, same pattern: governments love scorekeepers in opposition and resent them in power.

 

The current fight is over the definition of “capital,” which I cover in the tax section above. What’s worth adding here is how long the PBO has been waving the flag. In August 2025, before the government had even published its definition, the PBO pointed out that “capital spending is a well-defined accounting concept regulated by independent arm’s-length experts.” Translation: you don’t get to make it up yourself. In November 2025, it recommended that an independent expert body decide what counts as capital. That didn’t happen.

 

When the PBO’s latest report landed on September 24, Finance Minister François-Philippe Champagne’s office dismissed it. His spokesperson said the government had moved up balancing the operating budget “by a whole year despite today’s report purporting otherwise.”

 

Purporting. As if the PBO were a disgruntled blogger rather than an officer of Parliament whose job is to give legislators independent analysis of the nation’s finances.

 

The U.K. learned the hard way what happens when a government sidelines its scorekeeper. The Office for Budget Responsibility was created in 2010 to give the country independent analysis of its public finances. On September 23, 2022, Chancellor Kwasi Kwarteng delivered a “mini-budget” of unfunded tax cuts without an accompanying OBR forecast. Bond markets revolted. Within five days, the Bank of England was buying long-dated government bonds to stabilize the market. Kwarteng was fired three weeks later, and Liz Truss resigned as prime minister on October 20 after about six weeks in office.

 

The lesson isn’t that the OBR is infallible. It’s that markets treat an independent scorekeeper as part of a government’s credibility. Sideline it, and investors start doing their own math, and they charge for the uncertainty.

 

Canada isn’t the U.K. in 2022. But the direction is the same. Here, the government sets the fiscal anchor, defines capital, decides program by program which column the spending goes into, and then waves off the watchdog when it objects. That’s not a fiscal framework. It’s a self-graded exam.

 

The fix costs almost nothing: do what the PBO recommended a year ago. Hand the definition of capital to an independent body, publish the methodology and let the PBO reconcile every number. If the operating budget really is balancing a year early, the government has nothing to fear.

 

If it won’t, ask yourself why. I already know what the answer will be. And it’s consistent with what I’ve been saying all along: the separation of the budget into “operating” and “capital” is a deceptive trick.

 

Bonus Comment – From Richard Feynman – American Physicist – About Fooling Yourself

 

“The first principle is that you must not fool yourself – and you are the easiest person to fool.”

 

Agree. Governments are no exception. Neither are the rest of us.

 

I hope today’s newsletter has been thought-provoking for you.

 

As many of you know, I’m passionate about helping people make better decisions – whether in tax, leadership, or business. If you’d like to go deeper on those topics, my recently released book, Making Life Less Taxing Version Two is now available and expands on many of the practical ideas I’ve written about over the years.

 

I’m also putting the finishing touches on my next book, Leadership Compounds: How Small Decisions Build Culture, Credibility, and Legacy. It explores a simple but powerful idea: leadership isn’t about grand gestures – it’s about the small, consistent decisions that compound over time.

 

For those interested in a more hands-on approach, I’ll soon be announcing a bespoke consulting initiative – The Acorn Growth Program – designed to help leaders and organizations grow intentionally, one small (but important) decision at a time. Feel free to reach out to me directly for more information.

 

And if you’re not already on my mailing list, feel free to sign up for my In the Mood Network newsletters to receive more content. No fluff – just practical insights on tax, leadership, and economic policy.

 

Thanks for reading. As always, I welcome your thoughts and feedback.

 

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