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March 22, 2017

From: Alex Laurin and Bill Robson

To: Concerned Canadians

Date: March 22, 2017

Re: Budget 2017 - High Deficit, High Debt, and a Missed Opportunity

Notwithstanding talk about an innovative future, the 2017 federal budget is very much about the present. New spending sprinkled all over; bigger deficits, and for longer. While we wait for US tax reforms and trade talks to commence, Ottawa has missed an opportunity to steer fiscal policy toward a more competitive tax system to attract top talents, encourage private investment, and more work.

The budget does not put on the brakes on deficit spending. Overall program spending this year is about the same as was projected in last year’s budget, but spending in each of the next two years is higher by more than $5 billion. Thanks to lower projected debt charges – a windfall from lower interest rates – absorbing the drop in projected revenues, deficits in 2018 and in 2019 will be higher than anticipated in last year’s budget by about $5 billion, and by $7 billion in 2020. 

Further clouding this picture is the unreliability of some of the revenues in the fiscal plan. Higher excise taxes on alcohol and tobacco put pressure on a base that may shrink. Especially in the case of tobacco, we may find that smuggling and black-market sales increase more than federal revenue. And the $2.5 billion anticipated from unspecified tightening of the tax rules and enforcement is nothing but hand waving. Anyone who thinks the Canada Revenue Agency is knowingly leaving hundreds of millions of taxes uncollected must not have faced an audit recently.

Deficits mean higher taxes in the future. Today’s middle class – and those struggling to join it – may or may not benefit from this fiscal path. Tomorrow’s middle class – and those struggling to join it – will suffer.

And the escalating federal debt will not make it easier for the feds to fund infrastructure commitments – there is a limit to governments’ ability to borrow. Delivering on the Infrastructure Bank would help, and although the budget targets the next few months for the Infrastructure Bank to become operational, it provides no new details on its planned operations.

The bank is a good idea only if taxpayers reap the same rewards as their private partners for the public infrastructure they will ultimately pay for through their user charges. The bank should be investing in equity on the same basis as private investors, thus ensuring taxpayers are equally compensated for the financial risks they undertake.

Moreover, new investments sprinkled on improving skills’ development and an innovation strategy may yield long term economic fruits, but it does nothing to improve Canada’s attractiveness for top talents, high income earners, and global head offices. In many respects this is a budget in waiting for major trade reforms and tax reductions prefigured by the Trump administration.

Increasing the size of government and poking “the rich” in the eye is perhaps understandable in the heat of an election campaign, but the context has changed. More deficit-financed spending may mean saddling high-income earners – and those working to join them – with higher taxes in future budgets – no way to instill business confidence, attract investment or talent, and encourage work. The United States economy is doing well, and tax cuts may be on the way south of the border. Canada’s government needs to signal a change of course.

Alex Laurin is Research Director, and Bill Robson is President and CEO of the C.D. Howe Institute. 

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