Affordability pressures in Canada remain elevated. In 2024 — the most recent year for which there is comprehensive data — food insecurity reached record highs, nearly half of Canadians reported difficulty covering day-to-day expenses and housing costs outpaced incomes.
Although indicators for 2025 and early 2026 show modest easing in housing prices and inflation, affordability will likely remain a challenge in 2026, particularly for low- and middle-income households. In this context, the social safety net is a more important fiscal lever than ever.
Despite these pressures, federal budgeting practices risk narrowing how policymakers understand the value of social spending. Under the new federal capital budgeting framework, most transfers to individuals, including health and social transfers, and other program spending are classified as day-to-day operating expenditures rather than investments in people’s well-being. This classification matters because it shapes how programs are evaluated, prioritized and defended during periods of fiscal restraint.
Classification decisions influence not only headline fiscal indicators such as operating deficits. In addition, they affect how the long-term returns on spending are interpreted and weighed against short-term pressures. Research highlights that how expenditures are categorized affects the prioritization of resources in times of fiscal stress, particularly when scarce resources demand sharper tradeoffs between current consumption and future returns.
Expenditures categorized as operating costs receive less protection when budgets tighten, while those labelled capital investments are more readily justified as generating future benefits. As a result, programs that primarily build human and social capacity can appear less productive in fiscal planning, even when their long-term returns are substantial.
To assess the implications of this framework for social programs, it is useful to first understand the rationale for capital budgeting. Governments adopt capital budgeting to address the long-term nature of investment decisions — that is, how the costs and benefits accrue over time.
The federal government’s new Modernizing Canada’s Budgeting Approach describes the separation of capital investment from day-to-day operating spending. The framework is intended to create a consistent way to classify expenditures that contribute to capital formation and to prioritize long-term, generational investments, such as infrastructure, housing and productivity-enhancing measures.
Such a distinction is designed to improve the transparency and sustainability of fiscal planning, ensure costs are matched with the period over which benefits accrue and help manage long-term obligations in a way that balances the interests of current and future generations.
This logic is well-suited to physical assets with identifiable lifespans and depreciation profiles. It aligns less well, however, with many social programs where benefits accumulate gradually, compound over time and spill across areas rather than tie to a discrete asset.
When social programs are classified as operating expenses, they are evaluated by their immediate fiscal cost rather than their longer-run effects on individuals, communities and the broader economy. At a time when household budgets are strained and inequality persists, a narrow cost-based lens risks undermining social equity and economic growth.
Spending categorized as capital investment is typically justified as generating future growth or productivity gains and often receives more favourable treatment through budget protection. Spending classified as an operating expense, including transfers and social supports, is often treated as expenditures that contribute to deficits and should therefore be limited, particularly in times of tight budgets.
The result is an asymmetry: programs that Canadians rely on every day, including housing supports, child-care benefits and income transfers, face greater scrutiny than capital projects, even when their long-term social returns are substantial.
Unlike physical infrastructure, social expenditures — such as income supports, child care or housing assistance — generate ongoing and diffuse benefits that accrue over time, across populations and through complex social and economic pathways.
Evidence shows that many social programs do more than provide immediate, temporary support. They boost labour force participation, reduce inequality, and prevent or lower future costs in areas such as health care, shelters and the justice system.
Framing social programs primarily as costs overlooks their potential not only to generate long-term savings but also to improve outcomes across policy domains. Applying a strict operating/capital dichotomy can therefore understate the long-term contributions of social programs to well-being and economic capacity by focusing on annual costs rather than broader social returns.
What if Canada treated public social spending not simply as an expense to be minimized, but as an investment whose value can be measured and compared? This proposal does not seek to justify unrestricted spending increases. Rather, it strives to improve how governments evaluate and prioritize expenditures within financial constraints.
Treating social spending as an investment that yields long-term benefits would help governments make decisions that produce measurable gains in well-being. This would be especially true for low- and middle-income Canadians during this affordability crisis, when the social value of stabilizing their households, including their present and future economic participation, may exceed any immediate budgetary savings from funding cuts.
To illustrate what we mean, we propose using a social welfare-based metric — the marginal value of public funds (MVPF) — to evaluate social spending not as an operating expense but as a social investment.
The MVPF is a metric developed in public finance research that assesses how much social welfare is generated per dollar of government spending. It measures the ratio between the benefits that recipients derive from a policy and the net fiscal cost to the government, including long-term budgetary effects (see figure 1).
When a policy has an MVPF greater than one, it means that each dollar of public spending produces more than one dollar’s worth of value for recipients.
In some cases, policies can even pay for themselves over time. For example, expansions in children’s health insurance or education may increase future earnings and thus tax revenues while reducing the need for later government spending. These policies can lower the net fiscal cost to the government toward zero or a negative number once long-run effects are included.
In these scenarios, researchers describe the MVPF as infinite mathematically because the denominator (the net cost to government) approaches zero while the numerator (the social benefit) remains positive. Put another way, the government recoups its expenditure through increased tax revenue or reduced costs in other programs long term, so there is no net long-run cost to public funds.
However, it is important to note that infinite MVPFs do not imply literally limitless value or a guaranteed free lunch in all contexts. Rather, they reflect estimates in which long-run fiscal benefits are large enough to offset upfront expenditures and where the assumptions used to estimate those long-run effects — including behavioural responses and future fiscal interactions — generate a near-zero or negative net government cost. Whether a given policy exhibits this pattern depends on how future government revenues and savings are measured.
The MVPF reframes public spending from “money out” to “social value in,” allowing policy-makers to compare diverse interventions across affordability domains. Instead of evaluating housing supports, income transfers, energy subsidies or tax credits in isolation based on annual fiscal costs, the MVPF places them on a common social welfare-based footing that prioritizes outcomes for households with the greatest material insecurity.
The proposed Canada Groceries and Essentials Benefit (CGEB) illustrates how an MVPF lens changes evaluation. As announced recently by the federal government, the CGEB is intended to address the growing food insecurity and affordability crises.
Building on the existing GST/HST Credit, the CGEB includes a one-time 50-per-cent top-up in the 2025-26 annual value of the credit, to be paid by June, then increases of 25 per cent annually, starting in July.
It will provide up to $1,890 for a family of four in the first year and approximately $1,400 annually over the following four years. Single individuals could receive up to $950 this year and about $700 in subsequent years.
Under the traditional fiscal lens, reforms to income transfer programs such as the GST/HST Credit are often assessed primarily by their annual budgetary cost and whether they fit within fiscal envelopes. An MVPF perspective asks instead how much social value — measured in improved consumption, well-being and financial stability — each dollar of public investment generates, especially for households facing acute affordability pressures.
Evaluated through the MVPF lens, the CGEB increases government expenditures. However, because lower-income households have a higher marginal utility of income, directing additional resources toward them yields large welfare gains per dollar spent. Predictable, regular support can also smooth consumption and reduce short-term financial volatility — benefits that are not captured in simple cost accounting.
Beyond these immediate effects, a growing body of research finds evidence that links more generous and better-targeted income supports to a range of downstream benefits.
Studies of income support policies find links to healthier birth weights, lower parental stress, improved childhood nutrition, and higher school enrollment and graduation rates. Evidence from Canada also suggests that more generous family benefits can improve child mental health, illustrating how supports aimed at basic needs translate into broader well-being outcomes. These outcomes carry both intrinsic welfare value and may also generate future fiscal benefits through reduced demand for services and higher tax revenues.
The strength of the MVPF is its ability to compare the CGEB not only with other cash supports but also with interventions that do not take the form of direct cash transfers.
For example, policies such as transportation supports can raise effective income by lowering unavoidable living expenses, while investments in net-zero and climate-resilient housing can improve long-term living conditions and reduce exposure to cost volatility from extreme weather, utility disruptions and subsequent repair costs.
Although these policies differ in design and administrative mechanics, the MVPF places them on the same analytical footing by focusing on the social welfare benefits they generate relative to net public expenditures.
This comparative capacity is important because the existing GST/HST Credit, while beneficial, phases out quickly as income rises and provides only modest assistance to the lowest-income Canadians. The CGEB will retain this structure.
However, had the federal government adopted the Groceries and Essentials Benefit as initially proposed by the Institute for Research on Public Policy (IRPP) and the Affordability Action Council — a collaboration between diverse policy experts and community leaders, of which the IRPP is the research lead — it would have addressed this issue by increasing benefits to those with the lowest incomes. The MVPF would likely have been higher.
Under MVPF reasoning, a dollar directed to a household with an annual income of $20,000 yields a greater social welfare gain than a dollar directed to a household with a $60,000 income, even though both dollars count the same in fiscal cost terms.
Beyond whether a policy pays off, an essential question in evaluating public spending is who benefits. The traditional metric used in fiscal evaluation — the marginal cost of public funds (MCPF) — focuses almost entirely on efficiency. It asks how costly it is for government to raise an additional dollar of revenue through taxation but says nothing about the impact on those who receive the benefits.
By ignoring long-term gains, efficiency-focused measures such as the MCPF can lead to systematic policy errors. Programs that meaningfully improve the well-being of low-income households may appear unattractive from an MCPF perspective, even when they provide strong benefits.
By contrast, the MVPF addresses this gap by incorporating equity weights to recognize a simple but powerful fact: a dollar of support provides more value to a household with limited resources than to a household with higher income. This allows evaluators to quantify the social value of benefits received by different groups.
This is particularly relevant in Canada, where many people living in poverty are of working age, racialized, Indigenous and/or people with disabilities. Applying equity weights makes it explicit how different groups benefit from government spending and can reveal when policy priorities tilt disproportionately toward higher-income earners.
In this sense, the MVPF complements rather than replaces traditional cost-benefit tools, providing a broader social welfare-based framework for comparing policies when fiscal space is limited.
The MVPF is an outcome-oriented evaluation that reflects the trade-offs and benefits experienced by the households that government policies aim to support. It is a social welfare complement to traditional cost-benefit analysis, strengthening the analytical foundations for spending review, reallocation and reform decisions in an era of fiscal constraint.
In practice, embedding MVPF-style evaluation in federal budgetary decision-making would need to proceed incrementally. Not all programs currently generate the longitudinal data required to estimate full downstream effects on public finances or non-monetary social welfare gains for households. As well, departments vary substantially in their evaluation capacity.
For this reason, the MVPF should be used initially as a complementary tool — applied first to budgetary decisions involving large, recurring social programs with well-established administrative data, survey data and empirical analysis — rather than as an immediate replacement for existing cost-benefit or performance frameworks.
This type of approach is not without precedent. Federal departments have been required to analyze the costs and benefits of regulations, including impacts on the health and well-being of Canadians, for decades.
Over time, however, embedding a social welfare-based lens into policy approval and budgetary processes could improve how spending priorities are set across government. Several practical steps would support this shift:
Adopt a centralized social welfare-based evaluation framework for memoranda to cabinet and program evaluations: Develop a “social return on investment” (SROI) or social welfare impact analysis unit (or mandate) within central government (e.g., Treasury Board or Department of Finance) to help departments assess new and existing social programs using MVPF metrics.
Apply equity-sensitive valuation: Explicitly account for the higher marginal value of income support for lower-income households when evaluating new or existing tax and transfer policies. That is, apply the MVPF and quantify the equity weights in evaluations.
Enable cross-sector comparison: Use the MVPF to compare across policy domains — housing, child care, climate retrofits, tax credits, etc. — so that budgetary decisions are based on relative social returns rather than separate approaches in silos.
Commit to long-term tracking and cost recovery analysis: Recognize that some high-return social spending may pay off only years or decades down the line, much the same way that capital investment does. Budgeting processes should explicitly model and track those long-term fiscal results, even if it is difficult to do so with precision.
By embedding these steps into federal budgeting and evaluation, social spending would be evaluated not just by what it adds to annual deficits, but by how effectively public dollars translate into lasting improvements in well-being and economic capacity.
As Canada confronts persistent affordability pressures, inequality and growing social needs, it matters how government spending is framed. Labelling child-care subsidies, housing supports or transfers as operating expenses anchors them in a narrative of cost containment. This makes them easy targets for cuts when budgets tighten — even if they deliver long-term value.
A social investment lens offers an informative complement that can shift this narrative by recognizing the long-term value of supporting people’s well-being, reducing inequality and strengthening the economy. By evaluating programs according to the value they generate — not just what they cost in a given fiscal year — governments can better identify where limited public funds produce the greatest improvements in well-being.
The MVPF provides a practical way to implement this evaluation. It integrates fiscal impacts, behavioural responses and distributional effects into a single, comparable measure of social return. Used alongside existing tools, it can help policy-makers prioritize interventions that both strengthen household security and improve long-run public finances.
In an era of constrained budgets, the question is not simply how much government spends, but where each dollar does the most good. Treating social spending as social investment makes that trade-off explicit — and supports more informed, evidence-based decisions about Canada’s fiscal future.
