Policies from Ottawa harming Canada’s economic prospects
The Trudeau Liberals campaigned heavily in 2015 on improving the economy, particularly for middle-class Canadians. This is a laudable goal and one with which we agree wholeheartedly. Unfortunately, many of the policies introduced since the Liberals were elected have restrained economic growth. As the Liberals stressed during their time in opposition and now in government, policies must be evidence-driven, and evidence is mounting that the government’s approach isn’t working.
Budget 2015, the Harper Tories last budget, estimated future economic growth would average 2.2 per cent. Budget 2016, the first full budget for the Trudeau Liberals, lowered expectations for future economic growth to 1.9 per cent. Expectations were further downgraded to 1.7 per cent in the 2016 economic update. The Department of Finance’s long-term economic projections corroborated the decline in economic growth expectations.
The downgrading in economic growth comes despite a massive increase in government spending by the Liberals almost as soon as they were elected. The Tories originally planned for government spending (excluding interest costs) to reach $263.2 billion in 2015-16. Actual spending that year reached $270.8 billion. It’s expected to increase another $20.5 billion in 2016-17. The Liberals expected this influx of spending to improve the economy. Indeed, Table A2.3 in 2016 Budget details the added economic growth (0.5 per cent in 2016-17 and 1.0 per cent in 2017-18) and new jobs (43,000 in 2016-17 and 100,000 in 2017-18) expected from the new spending.
However, while the Liberals entered government with the best of intentions and a worthwhile goal of improving economic growth, most of what the government has actually done on the policy front has resulted in lower economic growth now and into the future.
One of the Liberals’ first policies signalled an interest in redistributing existing income rather than actually growing the economy. By raising tax rates on successful Canadians, including professionals, business leaders and entrepreneurs, the government reduced their incentives to invest and develop businesses in Canada, both of which we need more of.
The Liberals also chose to finance almost all of the new spending with borrowed money. The result—an expected deficit of $27.8 billion this year instead of a small surplus. Such deficits create uncertainty in the economy by increasing the likelihood for future tax increases. How much will taxes increase in the future and which taxes will be increased? Uncertainty is a killer for businesses, investors and entrepreneurs because it makes decision-making incredibly difficult.
Part of the increased spending planned by the Liberals was on infrastructure, which was supposed to improve our productive capacity and thus increase economic growth. However, only a small share of the so-called infrastructure spending was actually on infrastructure that improves our productive capacity. Most of the actual infrastructure spending is on pet spending projects such as public transit, parks and green technologies.
The additional spending also ignored the costs of government spending. Specifically, in order to finance spending, government must collect taxes now and in the future that have both direct and indirect costs on the economy. When we factor those costs into the infrastructure spending it’s highly unlikely that even the spending focused on improving productive capacity will actually result in a stronger economy.
Add those policies to others such as a national carbon tax, the rumoured increases to capital gains taxes, the agreed-to hike in the Canada Pension Plan tax rate, and the lowering of the age of eligibility for Old Age Security, and a clear picture emerges of a government that has done harm to our economic prospects through its policies. This cadre of economic growth-impeding policies is made all the more concerning when one factors in the potential for large-scale reform in the U.S., which could quickly render Canada uncompetitive.
If the government is truly interested in improving economic growth, the first step will be undoing—or at least halting—many of the damaging policies introduced during its first 18 months in power.
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