A federal budget that is equal parts unsurprising and uninspiring
This year's federal budget wasn’t all that surprising. Many of the government’s big initiatives were already announced or telegraphed in the Conservatives’ 2011 platform. The remainder included a smattering of smaller initiatives to satisfy various interest groups in advance of the federal election.
Where the budget falls short is on offering up big-thinking policy changes that would push Canada’s economy forward—something the country desperately needs in light of depressed oil prices and expectations for weaker economic growth.
An example of uninspiring change is the government’s primary tax policy change: reducing the preferential corporate income tax rate for eligible small Canadian businesses. The rate, currently 11 per cent, will be reduced by 0.5 points each year starting next year to 9 per cent by 2019.
While this might seem positive on first glance, it will create unintended distortions. Once fully implemented, the gap between the rate faced by small and large businesses will grow (the federal rate for large firms is 15 per cent). Previous research has shown that differential tax rates based on company size create a disincentive or barrier for small firms to grow into large ones. The risk is that small companies find ways to stay small to avoid paying the higher rate. This is problematic because large firms tend to invest more, be more productive and pay higher wages.
A better option would have reduced the general corporate rate (15 per cent), bringing it closer to the existing small-business rate (11 per cent).
More generally, Canada (both federally and provincially) has made great progress on making its corporate tax regime more competitive over the years. Where we lag relative to our international counterparts is on personal taxes; our rates tend to be higher and kick in at relatively lower income levels. This is something both Liberal and Conservative governments have identified as a key economic problem.
Reforming the federal personal income tax system would have given Canada the economic shot in the arm it needs.
For instance, the government could have enacted broad-based tax reform in the form of lower personal income tax rates to improve Canada’s competitiveness and strengthen our economy by encouraging productive activity like increased work effort, saving, investment and entrepreneurship. And the fiscal room for such reform could have been achieved by cleaning up the tax code and doing away with several boutique tax credits that increasingly populate our tax system and make it complex.
Alternatively, the Conservatives could have reduced capital gains taxes, which apply to the sale of assets when the selling price exceeds the original purchase price. This may not be the sexiest policy topic heading into an election year, but the reality is that capital gains taxes impose enormous economic costs and bring in relatively little revenue in return (just 1.1 per cent of total federal revenue).
The real drawback with this budget is the lack of strong economic vision for Canada and missed opportunity to truly set the foundation for stronger economic growth and higher living standards for Canadians.
That said, the budget did follow through on an earlier commitment to expand the annual room for tax-free savings account contributions to $10,000 from $5,500. This positive move will increasingly allow Canadians to shelter investment income from taxation.
As for the biggest news item in the budget, the government also followed through on its plan to return to a balanced budget this fiscal year, ending a seven-year period of consecutive deficits totalling nearly $150 billion.
While the Conservatives should be credited for remaining steadfast in their position to return to balance, there are reasons why the fiscal balance is far from certain. In order to achieve the $1.4 billion “surplus” in 2015-16, the government is partly relying on one-time asset sales (including a $2.1 billion net gain from selling General Motors shares).
In addition, the government has lowered the annual cushion in its fiscal plan relative to last year’s budget. The government had previously built in a $3 billion annual cushion to protect against unforeseen risks; the cushion was cut to $1 billion for the next three years.
In light of falling projected economic growth, now is a risky time to reduce the cushion, especially with razor-thin surpluses. Instead of bold, pro-growth ideas, the Conservatives chose a largely status quo and stay-the-course budget. It may not have been surprising, but it certainly wasn’t inspiring.
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