With the first budget in two years expected to be tabled in the near future, observers are wondering how the government will anchor fiscal policy and approach balancing pandemic spending requirements while taming the skyrocketing federal debt.
Allan Tupper, political science professor at the University of British Columbia, says the Trudeau government must balance pandemic demands with fiscal realities.
“I see this as an effort to reassure the public that they understand that the COVID-19 pandemic has extracted a powerful impact on the economy and on many Canadians’ lives and finances,” Tupper said in an interview.
“On the other hand, they have to give evidence that they’re aware of the amount of fiscal burden the Government of Canada has taken on … [and offer] answers about how and who is going to be paying for these very large expenditures.”
Tupper expects that provinces that ask for more will get turned down.
“The provincial governments all took on debt to deal with this, but nothing like the magnitude the Government of Canada has undertaken. So there’s not going to be a lot of money for general federal-provincial programming, or for dealing with problems that Alberta now takes to Ottawa.”
The last budget was delivered on March 19, 2019. While budgets are typically released in late March, the government has said the 2021 budget will be later this year, though nothing has been announced yet.
Trevor Tombe, an economics professor at the University of Calgary, says that this time around, the government can’t gauge the right short-term response without looking further ahead.
“The one thing I’d like to see is more clarity around the fiscal anchor, like what is the guide to federal fiscal policy? If it’s the debt-to-GDP ratio, OK, what’s the level? And what’s the future trajectory?” he says.
Tombe says that arithmetic trumps ideology with budgets, but how to reach the right balance is up for debate.
“Something that would be pretty interesting to consider would be increasing the GST and maybe to decrease the income tax rate. I think the conversation around taxes could be more nuanced than it typically is, and whether one wants to increase taxes to pay for spending programs.”
Geoffrey Hale, political science professor at the University of Lethbridge, believes that caution is required when tinkering with taxes.
“The government has to be careful how they look for new sources of tax revenue, to do so in ways that will not unduly distort the economy and which will not unduly undercut business investment, which has not been doing well in Canada for the last five years at least,” he said.
“A general personal and corporate tax increase is probably one that would face some kind of payback, given that the recovery looks very uneven.”
Hale said a lot of the past year’s federal handouts went straight into the markets, and the government could recoup some of it.
“The stock market has done quite well and there is a general expectation that the government will take some more as a higher percentage than they are currently taking. Realistically, they would probably be better off taking 75 percent of the average capital gains … to avoid too much in the way of games-playing in the tax system,” he said.
While pandemic spending will continue, Hale said it must be done more wisely.
“Rather than throwing a whole bunch of money out the door right away, they might try ‘ready, aim, fire,’” he said. “The federal debt has gone up by at least 20 percentage points relative to GDP in the last year, and that is an unprecedented amount in peacetime. That is not sustainable over the long term, especially when interest rates go up.”
Last June, Fitch Ratings downgraded Canada from an AAA credit rating to AA+ over what it called “the deterioration of Canada’s public finances.” In late August, Fitch warned, “Failure to place consolidated gross general government debt/GDP on a downward path over the medium term could lead to negative rating action.”
The fall economic statement released by Finance Minister Chrystia Freeland last November projected that the federal deficit would hit $381.6 billion in fiscal year 2020–21.
Aaron Wudrick, federal director for the Canadian Taxpayers Federation, said the high spending, low transparency, and poor results of the past year cannot continue.
“They have vastly overshot with income replacement in particular, sending Canadians roughly $7 for every $1 lost in income. That’s a pretty expensive miss. They have also clearly been sending wage subsidies to businesses that didn’t need it,” he said.
“Canada has spent more than almost any other country and got less to show for it. It’s essential that the next federal budget show there is a plan to get back to normal spending.”
Wudrick also hopes the government won’t reach deeper into Canadians’ pockets.
“Trudeau has been adamant that he won’t hike taxes, and I hope for Canadians’ sake he does not. But this is the same government that lied about future carbon tax hikes before the last election, so you can never be too sure.”