Federal budget 2016—four key questions
As the new Liberal government tables its first budget later today, here are some crucial questions for Canadians to consider:
1) Are the budget assumptions sound?
As with any budget, the first thing to establish is whether the government is using sound fiscal and economic assumptions. The Trudeau government’s credibility has been tarnished due to constantly shifting fiscal goals, as deficit projections have been steadily revised upward and balanced budget targets abandoned. The Liberals campaigned on a commitment to cap the size of the budget deficit next year at $10 billion. Now, media reports suggest a $30 billion deficit—triple the promised amount. It will be important to uncover how much of this year’s deficit is actually due to deteriorating economic conditions versus other factors such as higher-than-expected spending or overly conservative economic assumptions.
2) On spending, which path will the Liberals follow?
There are essentially two opposing paths the Liberals can choose to follow when it comes to government spending. One is the Chretien-Martin model, which focuses on disciplined government spending and a smaller size of government. The other is the approach taken by the Ontario Liberals, marked by large annual increases in spending financed by deficits. The evidence supports the Chretien-Martin approach of a smarter, leaner government. Following the major fiscal reforms in the 1990s, which included major cuts and reform to spending, the federal government eliminated the deficit and reined in government debt. The reforms fostered robust economic performance over the next decade, characterized by strong economic growth, growing incomes, job-creation, and low unemployment. This is consistent with the overall evidence that shows a positive return to economic growth and social progress when governments focus their spending and maintain a smaller footprint on the economy, allowing more of the economy’s productive resources to be directed by the private sector.
3) Will the budget address the burden being left on the next generation?
Federal government debt ballooned under the previous Conservative government since 2007/08, growing by $176 billion to $692 billion in 2015/16. That’s $19,302 per Canadian. Early indications suggest the Liberals will not halt this trend anytime soon, with deficits likely planned for the foreseeable future. But it will come at serious costs both in the short and long term. Even with historically low interest rates, the federal government is spending more than $25 billion on interest payments. That’s more than $2 billion a month. And economic research shows that increasing government debt endangers future economic prosperity. Critically, debt ultimately must be paid back in the future through taxes.
4) Will the Liberals match rhetoric with action?
Heading into the budget, the Liberals have talked a great deal about setting the foundations for long-term economic growth. In fact, this was a central theme of the party’s platform during the election. While a laudable goal, so far the government’s policies (both enacted and proposed) have been at odds with this rhetoric. Nowhere is this clearer than on tax policy. For instance, prior to the budget, the Liberals created a new top personal income tax rate for entrepreneurs and highly skilled workers, which will discourage people from engaging in productive economic activity (working hard, expanding skills, investing, being entrepreneurial), ultimately hindering economic growth. This move, along with numerous recent provincial personal income tax increases, has put Canada at a greater competitive disadvantage for attracting and retaining skilled workers and entrepreneurs. Rumblings about possible higher taxes on capital gains and innovators are also inconsistent with fostering entrepreneurship and growth.
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