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tax and spend

Deputy Prime Minister and Finance Minister Chrystia Freeland arrives to appear at a House of Commons finance committee meeting in Ottawa on Dec. 9.Adrian Wyld/The Canadian Press

The federal Liberals are facing increasing calls from the Conservative Opposition and others to scale back stimulus spending announced in the spring, as inflation heats up and the jobs market more than recoups its pandemic losses.

But those appeals for a reduction in stimulus spending, ahead of the government’s fiscal and economic update on Tuesday, don’t take into account the reality that the Liberals’ $100-billlion stimulus plan is far from the targeted and time-limited boost to the economy the government has portrayed.

“I just think it’s a grab bag,” said Kevin Page, president and chief executive of the Institute of Fiscal Studies and Democracy at the University of Ottawa, and a former parliamentary budget officer.

To begin with, the new spending for the current and next two fiscal years laid out in the part of the budget detailing the stimulus measures far exceeds the $100-billion ceiling Finance Minister Chrystia Freeland cited last fall as the tenet of the plan.

Weeks before her first fiscal update a year ago, Ms. Freeland promised Canadians that the federal Liberals would spend heavily – but strategically – to help the country recover from the coronavirus economic contraction.

“It’s going to need to be carefully targeted, and time-limited, and it’s going to need to be focused on getting Canadians back to work,” Ms. Freeland said of her government’s approach to economic stimulus.

A month later, the government said in its fiscal and economic update that it would spend up to $100-billion under a “stimulus recovery plan” still in the works. And in the April budget, the government boasted of its plan for “targeted stimulus.”

In that budget, the government did indeed outline $101.4-billion in spending for the fiscal years of 2022-22, 2022-23 and 2023-24, which Ms. Freeland’s office says represents the Liberals’ stimulus plan and which roughly corresponds to the $100-billion target.

But that figure wraps in not just spending, but also several tax increases, internal spending cuts and other measures that together offset billions of dollars in spending. For instance, the government included $1.76-billion in revenue over three years from stricter limits on interest deductibility for businesses, $1.3-billion in higher tobacco taxes and another $388-million from stepped-up collection of duties and taxes on imported goods. It also included a projected $666-million in savings from reduced government travel.

Set aside that accounting, and the total spending over three years is actually $114.3-billion, much higher than the $100-billion that Ms. Freeland presented as a ceiling. Mr. Page said it is odd to include general tax increases when accounting for stimulus spending, but he said he viewed the reallocation of funds from internal cost efficiencies as a logical rationale for reducing the net price tag of the Liberal plan. On that basis, the total spending over three years would edge downward to $113.7-billion.

The Finance Minister has also consistently stressed the point that the Liberals’ stimulus plan is temporary in nature. But that is true only for a minority of the $114.3-billion in spending. The three-year tally for initiatives that expire after 2023-24 – meeting the definition of temporary articulated by the government – is just $48.5-billion, or just more than two-fifths of the total. (Those figures do not include the impact of additional spending announced since April, including the extension of wage subsidies and other pandemic income supports. On Thursday, Ms. Freeland said the extension of various supports would cost an additional $7.4-billion.)

The majority of the stimulus spending, amounting to $65.8-billion over three years, continues on after 2023-24 – anything but the “time-limited” framework that Ms. Freeland had promised.

What’s more, a number of those measures are at the heart of permanent Liberal spending priorities. Chief among those are the substantial outlays for an expansion of subsidies for lower-cost child care, with $14.2-billion to be spent in the current and next two fiscal years. That program is certainly not temporary, continuing on through fiscal 2024-25 and fiscal 2025-26 at a two-year cost of $15.6-billion. The Liberals have simultaneously touted their enduring commitment to child-care funding and their focus on stimulus measures – which includes those child-care funds – as temporary.

Similarly, there are many other commitments that are permanent, or at least extend beyond 2025-26, that make the government’s stimulus approach look less like a plan for countercyclical spending and more like a roster of its policy priorities and proclivities. There is $4.9-billion over three years for infrastructure for Indigenous communities. Another $5.1-billion is allocated to enriching the Canada Workers Benefit; $3.5-billion for “supporting innovation and industrial transformation”; and $1.9-billion for public transit. (Ironically, the government calls this particular temporary measure the “permanent public transit fund.”)

And then there are a slew of permanent small-scale programs that are anything but short-term stimulus spending, including $5-million a year for establishing a new data commissioner; a net $2-million a year for the “learning to camp” program; and an initial $26-million a year for improving health care services for the Canadian Forces.

Finally, there is the reality that there are fewer than four months left in the current fiscal year, with much of the spending outlined in the budget already out the door. Payroll subsidies for businesses and income supports for individuals were heavily weighted toward the first seven months of the fiscal year. If those spending categories, plus costs tied to health measures to fight the coronavirus, are excluded, only a relatively modest $20-billion over three years potentially remains on the chopping block.

Mr. Page noted that $20-billion in spending is not “chump change.”

Don Drummond, an economist and a former senior federal Finance official, said there is a handful of obvious candidates for cost savings, including the planned increase in Old Age Security benefits, projected to cost $10.3-billion over four years, starting in fiscal 2021-22.

But such dramatic spending cuts are unlikely, Mr. Drummond said, even if the government was aiming to reduce annual deficits and accelerate a projected leisurely decline in the ratio of net debt to gross domestic product. More politically plausible is an approach that would limit the annual growth in program spending outside of health care transfers to 3 per cent, he said. Barring that, tax increases could be in the cards, especially as pressure grows from the provinces to increase health transfers, Mr. Drummond said.

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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