Fraser Forum

Trudeau government 0-for-3 for budgets that improve fundamentals for growing the economy

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With the Trudeau government tabling its third budget, the script has become familiar. Each budget the government loudly proclaims platitudes about growing the economy and helping the middle class.

In reality, there’s no magic lever to pull and grow the economy. Canada’s economy is a collection of untold number of transactions and interactions between millions of people, far too complex for a government to steer or control. But there are some basic fundamentals the government can establish to help foster an economic environment conducive to growth.

Among these fundamentals is policy certainty, aided by a balanced budget, and competitive taxes. The 2018 federal budget, like the two budgets before it, fails to improve the fundamentals. In fact the budget will cause self-inflected wounds by doubling down on the government’s strategy of deficit spending and counterproductive tax increases.

The government has once again refused to set a timeline for returning to a balanced budget. Rather than the three years of modest deficits (with a return to balance by 2019/20) that was promised to Canadians, we actually got annual deficits nearly double the amount and more than triple the cumulative deficit over four years. And according to the Department of Finance’s latest projections, budget deficits are expected to persist for the next three decades.

While the federal government claims deficit spending will help grow the economy through infrastructure investments, in reality, little of the deficit is being spent on new infrastructure projects—only 10.7 per cent in 2016/17, according to estimates from the Parliamentary Budget Officer.

Also concerning, only 10.6 per cent of the government’s new infrastructure spending is for projects that will help grow the economy through enhancements in productivity. Put differently, virtually all the deficit spending is for current consumption while little is for infrastructure investments that will help the economy grow.

Crucially, deficit spending during a period of economic growth—as proposed in the 2018 budget—puts federal finances at risk should a recession occur. A recession would decrease federal revenues and automatically increase certain spending (such as Employment Insurance) leading to deeper deficits and more government debt. Moreover, budget deficits are essentially deferred taxes, which creates uncertainty about future tax increases to service and repay government debt.

Further tax hikes would come on top of higher personal income taxes, which have increased for Canadian families—including the vast majority of middle-income families—since this government has been in office. It would also come on top of payroll tax hikes championed by the federal government set to begin next year. And federally imposed carbon pricing, which will contribute to a chill on investment as the U.S. federal government has eschewed its own carbon-pricing system.

On the tax front, the 2018 budget includes new rules on passive investment in private corporations. This is just the latest tax change that signals to entrepreneurs and investors that Canada is not a place to setup shop and invest.  

The budget is particularly disappointing on tax policy, given the need to respond to sweeping tax reform in the U.S. For the first time in nearly two decades, Canada has lost its competitive advantage on its business tax regime, striking a major blow to the country’s investment prospects.

Given that the government is once again doubling down on its approach of deficit spending and counterproductive tax changes, where’s the evidence that this approach is working?

Even the government’s own budget document indicates that Canada’s economy will face years of sluggish economic growth. In fact, the budget makes clear that the solid economic growth of 3.0 per cent in 2017 is a onetime blip. Economic growth is expected to fall to 2.2 per cent in 2018 and 1.6 per cent in 2019. Moreover, the Department of Finance forecasts economic growth will average just 1.8 percent for the next four decades—compared to average growth of 2.7 per cent over the previous four decades.

Meanwhile, the expectation is that other industrialized countries will enjoy stronger economic growth in the years ahead, making Canada a laggard (the OECD projects U.S. growth at 2.5 per cent in 2018).

With this budget, the government is 0-for-3 for budgets that improve the fundamentals. Instead, unfortunately for Canadians, it’s chosen to continue with counterproductive policies.


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