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tax and spend

Prime Minister Justin Trudeau waves following his victory speech at campaign headquarters in Montreal on Sept. 21, 2021.Paul Chiasson/The Canadian Press

The Liberals have a carefully crafted plan to slowly pare Ottawa’s relative debt burden over the next five years, even as they spend tens of billions of dollars to fulfill campaign promises.

The party laid out detailed costing during the campaign that would see it add tens of billions in revenue and spend even more, but still keep the growth in the net federal debt slightly lower than the growth in gross domestic product. That would allow the Liberals to hold to their fiscal anchor of gradually reducing the ratio of net federal debt to GDP.

But that plan is about to crash into the reality of minority government, as both the NDP and Bloc Québécois push for enormously expensive measures that would send the deficit skyrocketing, and set the federal debt burden on an upward march.

Beyond the cost of buying support in the Commons, the Liberal plan is built on less-than-concrete assumptions about new sources of revenue, beyond those forecast in the pre-election baseline scenario from the Parliamentary Budget Officer.

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The biggest source of new revenue is also the most uncertain: billions of dollars a year to be reaped from tax dodgers. But the PBO has already flagged its concerns that the Canada Revenue Agency may not be as successful as it has been in the past in being able to use new funding to crack down on tax avoidance.

Also uncertain are the billions of dollars forecast to come from what the Liberals call a “Canada Recovery Dividend.” It would be a temporary tax on banks and financial institutions, distinct from a separate 3-per-cent levy on profits above $1-billion for the largest banks and financial institutions. But the Liberals have yet to say how it would be structured, beyond a broad statement that they would consult with the Superintendent of Financial Institutions.

Together, those two tax measures are projected to raise $17.4-billion over the next four years, more than two-thirds of the new revenue appearing in the Liberals’ campaign platform.

But those projections are uncertain enough that some economists are already discounting how much tax revenue the two measures will actually end up generating. “Both of these are questionable to a degree,” said Stephen Brown, senior Canada economist for Capital Economics.

He has adjusted his own model to reduce by half the amount of revenue coming from the CRA crackdown and the Canada Recovery Dividend. That results in higher deficits, and a small rise in the ratio of net debt to GDP, in part because he is forecasting weaker economic growth than the PBO. Even so, the Liberals would not be straying too far from their promised fiscal anchor of a declining debt burden.

But the spending demands from the smaller opposition parties would exact a much higher fiscal toll, and likely result in the government breaking its pledge of a falling debt burden, relative to the economy.

The most costly by far is the Bloc’s demand for steep increases in the Canada Health Transfer, the cash that Ottawa pays each year to the provinces and territories. In a postelection news conference on Tuesday, Bloc Leader Yves-François Blanchet told reporters that health care funding is the most pressing issue in the country.

The Bloc wants the federal government to agree to the demand from the premiers for an immediate increase of $28-billion in the CHT, nearly a two-thirds increase to the $43.1-billion currently budgeted for fiscal 2022. In addition, the Bloc wants to see those transfers increase by at least 6 per cent a year, up from the current floor of 3 per cent. (During the campaign, the Liberals proposed increased targeted spending on health care, but the price tag of those proposals is far smaller.)

Together, the two measures that the Bloc is pushing for would send the cost of federal health transfers skyrocketing over the next four years, as the chart below shows. The CHT would hit $90-billion in fiscal 2026, a 75-per-cent increase from the $51.7-billion cost projected by the PBO last month.

If the Liberals acceded to that demand, the deficit in fiscal 2026 would more than double from the $32-billion that the party’s campaign costing forecasts, rising instead beyond $70-billion. And that scenario would see the ratio of net debt to GDP rising over the next four years.

For its part, the NDP campaigned on targeted health care spending that would fund specific priorities, most notably a pharmacare program that would ramp up to an annual cost of $11.4-billion by fiscal 2026. NDP Leader Jagmeet Singh told reporters on Tuesday that he wanted to work with the Liberal government on implementing pharmacare.

The Bloc says it will also push for recent increases in Old Age Security benefits to apply to all seniors, not just those over 75. Extending those benefits would cost $1.6-billion in the next fiscal year, and at least $6.6-billion a year after that.

Rebekah Young, director of fiscal and provincial economics at Bank of Nova Scotia, said she believes the Liberals will ultimately resist pressure to significantly add to their spending plans, adding she does not see the net-debt-to-GDP ratio changing much from the party’s projections.

The Liberals have shown a “strong resistance” to increasing unconditional health transfers, Ms. Young said. As for pharmacare, the Liberals may well keep that as a program to promise in the next election, she said.

But Ms. Young said the Liberals have demonstrated a willingness to spend any fiscal windfall that arrives from stronger-than-expected economic growth, allowing them both to launch new programs and adhere to their fiscal anchor.

Long-term interest rates are also running slightly below the forecasts of both the April budget and the PBO election baseline, potentially reducing debt servicing costs in coming years.

And the Liberals’ cost projections from the campaign include $15-billion in contingencies, nominally for costs created by the coronavirus. But if those costs do not arise, the Liberal government would have substantial funds to spend – without fouling its fiscal anchor.

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

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