On March 22, 2017, the Federal Liberals tabled their 2017 budget.
For the second straight year, the Liberals have blown past their campaign promise to run a $10 billion “modest deficit” posting a record $28 billion deficit for 2017-18, with no plan to return to balance. Moreover, the budget raises taxes on everything from public transit, to Uber, to beer and wine, and does nothing to support small businesses. And, once again, the Liberals failed to deliver on their commitment to lower the small business tax rate.
The Liberals also broke their campaign promises to cap deficits at $10 billion and return to a balanced budget in 2019-20 (Table 1). In fact, deficits over the forecasted period will be $13.3 billion higher than projected in the Fall Economic Statement last November, although this is because Budget 2017 reintroduces $3 billion annual contingency. Nothing in the budget contradicts the long-term projections released by Finance Canada in December, which suggested that the federal government at current spending levels will be unable to balance the budget until at least 2050-51.
Table 1: Forecasted federal budget balance ($ billions)
|Fall Economic Statement||-25.1||-27.8||-25.9||-19.3||-16.8||-14.6|
Budget 2017 has a slight increase in spending, with new measures costed at $4.8 billion over six years. But this is net $4.7 billion worth of tax increases (discussed below). Without these tax increases, the fiscal cost of the measures would’ve been $9.5 billion. Moreover, the government says there was $0.9 billion worth of policy actions taken in the period between the November update and budget.
The new spending is mostly for skills development and health care, which respectively receive $5.2 billion and $5.8 billion over six years. These items consist primarily of money to provincial governments and had not been previously included in the fiscal framework.
However, most of the initiatives in the budget are funded with existing envelopes of money. Child care and affordable housing commitments are financed from the Social Infrastructure fund. Innovation investments in “superclusters” ($1 billion over six years) and a new “Strategic Innovation Fund” ($1.3 billion) are paid for with money set aside last budget for research clusters, public transit and green infrastructure, as a well as a restructuring of existing programs.
Economic Growth outlook
The economic growth outlook has worsened since last year’s budget (Table 2) despite the fact that the government said its spending measures would boost GDP by 0.5% in 2016-17 and 1% in 2017-18. The government admits that implementation of Budget 2016 experienced some “slippage” with respect to infrastructure spending, with only 50-75% of the cash on track to be disbursed on time. As a result, they’ve revised the expected impact on GDP for 2016-17 down to 0.4%. But even this figure is an exaggeration. For it to be true, you have to believe that the underlying economy was significantly weaker than the opinion of the vast majority of analysts.
Table 2: GDP growth projections
|Budget 2016 (before impact of spending)||1.4%||2.2%|
Budget 2017 gives a finer breakdown of the long-term infrastructure plan that was announced in last year’s budget and fall update. Of the $81 billion promised, the Liberals plan to spend $21 billion in the next five years. As suspected, much of the funding is going to government programs that are hard to characterize as productivity or growth-enhancing infrastructure (e.g. child care, homelessness, ocean protection). And most of the money that is set aside for hard infrastructure projects will go through bilateral agreements with provinces, raising questions about timeliness and whether these investments are truly “new” investments. The remainder is going to the Canada Infrastructure Bank, which remains short on details but considered a potential way for the current government to reward projects to specific organizations without the usual checks and balances in place.
Skills & Innovation Programs
The Liberals are touting $4 billion in new innovation and skills programs over the next 6 years as a key to driving growth. While there are some positive aspects to what they announced—making businesses compete for innovation funding, looking to private sector leadership as opposed to universities, extending investments in venture capital funds—the overall impact will be modest. A recent report from the University of Ottawa found that the federal government currently spends $22.6 billion a year on over 147 skill and innovation-related programs, with little understanding of their performance and value for money. And much of the skills funding in this budget, like the infrastructure spending, is set to run through the provinces, making it harder to set priorities and ensure results.
Furthermore, there’s nothing in the budget to respond to the threat of U.S. protectionism or tax reforms that could put Canada at a competitive disadvantage in attracting investment, prompting criticism from the Canadian Chamber of Commerce and Business Council of Canada. The Finance Minister says he is waiting to see what happens in the coming months, allowing for the possibility of measures in the next fall update. But there’s no room for tax cuts on the scale of what’s being discussed in Washington, unless the Liberals are prepared to hike deficits even further or undertake major spending cuts.
Budget 2017 includes a variety of new tax measures that together raise $4.7 billion over six years. Although the Liberals held off on the bulk of their planned tax expenditure reforms, the budget cancels tax credits for public transit, child care spaces, insurance cooperatives, and gifts of medicine to charities. Expect more to be axed in the fall update.
Small Businesses & Employment Insurance
The tax bill for businesses is going up. Small businesses will be under yet more scrutiny from tax authorities. Designated professionals will no longer be able to time their billing to lower their tax burden, and new measures will be announced to make it harder for family businesses to distribute income to different family members in order to lower their tax burden. Payroll taxes will be higher as Employment Insurance premiums go up from $1.61 to $1.68 per $100 in earnings. The government will also introduce legislation to hike fees for businesses using government services. Although the Mineral Exploration Tax Credit was extended for another year, changes to tax rules for oil and gas companies will reduce their deductible expenses.
Consumers are paying more too. Excise taxes on alcohol and tobacco are going up by 2% immediately (and subsequently will be indexed to inflation) and ride-sharing services such as Uber will now have to charge GST on their sales.
The national carbon price gets a mention in the budget, but only to say that the federal government will launch consultations to design the federal “backstop” tax that will apply to provinces that don’t meet the floor price. It’s not clear whether the government is projecting higher GST revenues to reflect how carbon charges add to the taxable price of goods and services.
It’s not just taxes that are being used to pay for Liberal spending. Budget 2017 makes major cuts to defense, despite demands from the U.S. that NATO members spend at least 2% of GDP. The government is deferring $8.5 billion in equipment purchases, having already deferred $3.7 billion in the past budget. Although the budget makes no mention of airport privatization, it says the government will conduct a 3-year review of federal fixed assets, leaving the door open to future sales that could be used to finance the Canada Infrastructure Bank, which is still missing $20 billion.
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