Jock Finlayson | Liberals step up state involvement, downplay role of enterprise in economy
Bill Morneau’s spending-heavy budget underscores two important shifts in the country’s economic and political landscape.
The first is Canada’s diminished economic prospects in an era of weak global growth and sluggish commodity markets. In the past two years, Canada has been buffeted by a substantial “terms of trade” shock, as the prices of our exports have fallen relative to what we pay for imports. Commodity prices, in particular, have plunged, a real blow for an economy that relies on natural resource industries for half of its exports and two-fifths of business investment.
A second important shift is the election of a federal government with different priorities than those of its predecessor. Compared with the defeated Conservative regime, Justin Trudeau’s administration is committed to a more activist agenda on income inequality, the environment, urban issues and the needs of First Nations communities. The new budget reflects these priorities, mainly by boosting federal expenditures in all of the above areas. Overall, program spending is slated to rise by a hefty 7.6% in 2016-17 and 4.5% the following year. Whereas the Stephen Harper government was wedded to shrinking Ottawa’s footprint, the Liberals envisage a greater federal role in economic and social affairs.
Thus, the rhetorical preoccupation with balanced budgets that has long been a staple of Canadian politics is cast aside, as the Trudeau government prepares for a string of deficits. While the updated five-year fiscal projections will alarm some, it is helpful to maintain perspective. The $29 billion in red ink that the finance minister is planning for both 2016-17 and 2017-18 – after that, the deficit is supposed to fall – should be seen against the backdrop of Canada’s $2 trillion economy. At 1.5% of gross domestic product, the next two years of deficits count as moderate fiscal shortfalls by the standards of most other affluent economies, including the U.S. and the U.K.
Still, the extra $100-billion-plus in debt that the Liberals are on track to accumulate by the end of the decade does give one pause. What if a U.S. recession intercedes or interest rates defy market expectations and rise significantly? Canada’s triple-A credit rating could be in jeopardy if external events do not unfold as the finance minister assumes. A faster return to balanced budgets would reduce Ottawa’s fiscal risks over the medium term.
Budget 2016 signals a stepped-up program of infrastructure investment. In the near term, Ottawa will deploy an additional $12 billion to help advance projects encompassing public transit, water and waste-water systems, “green infrastructure” and social housing. The details on Phase 2 of the government’s 10-year infrastructure plan are to be fleshed out later. Oddly, the budget puts no emphasis on leveraging private-sector capital to assist in building infrastructure.
The budget heralds changes in the structure of benefits for families with children, the employment insurance system, programs touching Aboriginal Peoples and income transfers to seniors. In several cases, new spending obligations are hard-wired into the budget, which will add to the fiscal pressures on Ottawa down the line. The decision to reverse the staged increases in the eligibility age for old age security enacted by the Harper government deviates from the trend across the developed world and seems ill-advised given Canada’s aging demographic profile.
Thankfully, the 2016 budget steered clear of additional tax hikes, including on capital gains income and stock options. The rumour mill had hinted at changes in these areas, but the government demurred. That said, the finance minister pledges to launch a review of existing “tax expenditures” and tax preferences, which could have implications for a wide range of targeted tax benefits now available to individuals and businesses.
There is not much in the budget to excite the business community. In fact, it downplays the role of enterprises and entrepreneurs in driving economic growth, job creation and innovation. This is a puzzling oversight, one that perhaps reflects a state-centric view of how a modern economy operates. •
Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer.
Niels Veldhuis | Liberal 2016 budget long on pro-growth rhetoric but short on economic action
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% jump.
Add the 6.7% increase in spending last year and spending will increase 14.8% 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% of GDP to 14.6% 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.
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. •
Niels Veldhuis is president of the Fraser Institute. This article was co-written by Charles Lammam, the institute’s director of fiscal studies.
