Liberal 2016 budget long on pro-growth rhetoric but short on economic action

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Appeared in Business in Vancouver, March 29, 2016

In his budget speech, rookie Finance Minister Bill Morneau went to great lengths to highlight that the Liberal government’s budget would improve the long-term growth prospects for the Canadian economy. His opening monologue started with “Today, we begin to restore hope for the middle class. Today, we begin to revitalize the economy,” and ended with “[The budget] is an essential step in a sustained, strategic effort to restore prosperity.”

Good rhetoric to be sure.

Unfortunately, the budget lacked any real policy action that will positively impact long-term economic growth. Worse still, many policies will hinder the Canadian economy.

For starters, the budget proposes to ramp up spending under the mistaken notion that governments can spend our way into prosperity. This year alone, spending is projected to increase by $20.5 billion, a 7.6 per cent jump.

Add the 6.7 per cent increase in spending last year and spending will increase 14.8 per cent over just two years.

While the government claims increased spending will help the economy grow, the evidence from Canada and around the world shows otherwise.

For example, leading fiscal policy expert and Harvard University professor Alberto Alesina conducted a comprehensive analysis of stimulus initiatives in Canada and 20 other industrialized countries from 1970 to 2007.

He and his co-authors found that “a one percentage point higher increase in the current [government] spending-to-GDP ratio is associated with a 0.75 percentage point lower growth.”

That does not bode well for the Liberal government that is planning to increase federal spending as a percentage of GDP by almost two percentage points by the end of next year (from 12.9 per cent of GDP to 14.6 per cent  in just two years).

The dramatic ramp-up in spending will also materially increase the federal debt, leaving a larger bill for the next generation.

Specifically, the budget calls for a $29.4 billion deficit this year and projects that total federal net debt will increase by $123 billion over the next five years.

Also troubling is that the Liberals have no plan to bring the budget back to balance during their first mandate. In other words, the budget leaves the task of balancing the books to the next government.

The consequence of sustained government borrowing will be heightened uncertainty for entrepreneurs, investors and businesses, as it increases the risk of tax hikes in the future, dampening the viability of current investment while endangering our future prosperity.

The Liberals have also increased taxes on highly skilled, educated workers (such as entrepreneurs, business professionals, engineers and doctors), which will further harm our ability to attract skilled workers and discourage Canadians from realizing their full potential.

Canada now has the second-highest personal income tax rate on skilled, educated workers of any G7 country, behind only France.

As both the previous Conservative governments have acknowledged, Canada needs lower personal income tax rates—not higher—to attract, retain and encourage entrepreneurship and investment.

Unfortunately, the Trudeau Liberals have chosen to ignore the evidence regarding policies needed to improve the long-term outlook for the Canadian economy.

A genuinely pro-growth agenda would have focused on prudent, focused spending and competitive tax rates.

Instead, the budget commits the government to big increases in spending and debt that will hamper future economic growth, making it harder for businesses in B.C. and across Canada to succeed.

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