DAVE CHAN FOR THE GLOBE AND MAIL
After months of flowing rhetoric about sunny ways and a different approach to politics, Tuesday’s federal budget marks a key moment for the new Liberal government: Is there substance behind the new style?
Investment in Canada’s indigenous people – amounting to billions of dollars – is emerging as a key theme in the federal budget today. The funding will flow to education, housing, child welfare and water quality, the Globe’s Robert Fife and Bill Curry report.
Last fall’s Liberal Party election platform is an obvious guide as to what the budget will contain. But much has changed since Oct. 19. Economists have repeatedly lowered their forecasts for economic growth and, as a result, the size of next year’s federal deficit is now expected to be three times as large as what the Liberals promised during the campaign.
That economic reality places Finance Minister Bill Morneau in a bind. Will he deliver on all of the party’s spending promises or put some on hold in order to diminish the sticker shock of an expanding federal deficit?
Before the plan is revealed, these are the key issues to watch for in the first budget under Prime Minister Justin Trudeau.
THE BIG PICTURE: CANADA’S ECONOMY
How high will it go? The Liberals made three promises related to the deficit:
- They would keep it under $10-billion a year.
- Any deficit would be erased before the next election.
- The debt-to-GDP ratio would shrink over four years.
Only the third promise still stands.
Mr. Morneau moved to get the surprise of a much larger deficit out of the way early by announcing that next year’s deficit is on pace to reach $18.4-billion before accounting for new spending promises. That means that adding on the promises made in the election platform would produce a projected deficit of around $30-billion.
This could all be a setup. Mr. Morneau’s gloomy deficit projection includes $6-billion a year in contingency funds, which is twice the amount that is commonly set aside in federal budgets. Booking such a large contingency will make it easier for the Liberals to beat their fiscal targets over time as the next election draws closer.
Still, economists want to see a credible plan and a timeline for how these new deficits will be erased.
“When you’re re-entering a period of deficits, you just want to know there’s still a plan to get back to zero,” said Craig Wright, Royal Bank of Canada’s chief economist. “It was a hard-fought battle over the last while and hopefully we haven’t forgotten it.”
When Stephen Poloz, the Governor of the Bank of Canada, said he expected the Canadian economy to grow by 1.4 per cent this year, he cautioned that the figure should be treated with an asterisk.
The bank, like many other forecasters, expects fiscal spending measures in the budget will stimulate economic growth, but the bank chose to wait until the budget before attempting to estimate that impact. Other private-sector forecasters have included assumptions for new spending in their projections for growth. As a result, the various forecasts for the Canadian economy are often attempting to measure different things. The budget should clear up that confusion. Economists will be looking to see the timing of how new spending will roll out and will be testing the credibility of those plans. They will then update their own growth forecasts accordingly.
The Liberals promised to spend $60-billion in additional money on infrastructure over 10 years, split evenly between public transit, green infrastructure and social infrastructure. But details as to which major projects will be approved likely won’t come on budget day. In a recent interview with Bloomberg, Mr. Trudeau said the first couple of years will focus on “unsexy” spending to repair existing infrastructure, which municipalities have long warned is badly in need of funding.
Social housing is expected to be a big winner during this first phase of infrastructure spending.
In the interim, the government will spend the next year working with premiers and mayors on how to spend the rest of the money in the second phase. Questions remain about how the bill would be distributed among other levels of government. (B.C., for example, says it won’t contribute more than a third of the money needed for major transit projects.) Federal Infrastructure Minister Amarjeet Sohi has said the government has considered picking up more than the one-third of the bill it normally pays. Ottawa also faces a tricky balancing act between “shovel-ready” projects that will yield immediate short-term benefits to the economy, and longer-term ones with potentially bigger payoffs. “It’s not enough for a project to be shovel-ready; a project needs to be shovel-worthy as well,” Mr. Sohi told Toronto’s Board of Trade in January.
WHAT’S IN IT FOR YOU: TAXES AND PERSONAL FINANCE
The Liberals have already implemented their promised changes to personal income-tax rates: income between $45,282 and $90,563 is now taxed at a rate of 20.5 per cent instead of 22 per cent and a new tax bracket of 33 per cent now applies to income of more than $200,000. The Liberals have already announced that their income-tax cut aimed at the middle class will be significantly more expensive in terms of lost revenue than the party had estimated during the election campaign.
There are widespread calls for a broad review of Canada’s tax code, which is viewed as excessively complicated. The Liberals promised to find $3-billion a year in savings by reviewing so-called tax expenditures, the various tax breaks for individuals and business. The government has not said which tax credits they would eliminate. Moving in this area will be politically challenging, given that so-called boutique tax breaks like child fitness tax credits or credits to offset the cost of a tradesperson’s tools have very specific constituencies of support. The Liberals also promised to ensure small-business tax breaks are not used by wealthy Canadians as a way of avoiding tax through income splitting. The business community is nervously waiting to see what the budget will say in relation to business and corporate tax rules.
“We’ve said in our campaign, and we continue to believe, that it’s important that we have tax fairness,” said Mr. Morneau cryptically in a recent interview with The Globe and Mail. “We’ll have some details in the budget that will, I think, be very much aligned with what people would have heard us say over the last six months.”
One of the most challenging policy files for the federal government will be delivering on promises to reform Employment Insurance. Alberta is looking for changes that will make the program more accessible to the province’s recently unemployed. Atlantic Canada’s Liberal MPs want an end to 2012 reforms that restricted access to the program for repeat users. Business groups are cautioning that the program should not provide disincentives to work and that premiums should be kept low.
Changes to EI must also be considered in light of the government’s plans to reform the Temporary Foreign Worker Program. The Canadian Agricultural Human Resource Council recently issued a report warning that labour shortages are costing the agriculture sector $1.5-billion a year in lost sales and production. Producers want exemptions to some of the foreign worker rules brought in under the Conservatives in 2014.
“It is a public policy minefield,” said John Williamson, a former New Brunswick Conservative MP who is now vice-president of research at the Atlantic Institute for Market Studies. Mr. Williamson said that in Atlantic Canada, some businesses view the EI system as a source of competition in their effort to attract workers.
“This issue boils down to one of workers on one hand, versus companies trying to source more labour. There are some competing interests there, which is what makes it so difficult,” he said.
Last week, Mr. Trudeau said the budget will return Canada’s pension eligibility to age 65, undoing changes by the previous Conservative government that would have raised it to 67 effective 2023. The government has made other changes to Canadians’ options for retirement planning and savings: The Jan. 1 tax changes lowered the annual amount Canadians can contribute to tax-free savings accounts from $10,000 to $5,500, undoing an increase by the Conservatives, who had first introduced TFSAs in 2008. (A TFSA differs from registered retirement savings plans in that contributions aren’t tax-deductible. Here’s Preet Banerjee’s explanation of how the current contribution rules work.)
The centrepiece of the budget, according to Liberals, will be the Canada Child Benefit. The party promised to cancel four existing programs – the Canada Child Tax Benefit, the National Child Benefit Supplement, the Universal Child Care Benefit and income splitting for parents with children under 18 – and bring in a new tax-free, income-tested monthly Canada Child Benefit.
The platform said the existing programs cost $20-billion and the new system will cost $22-billion a year. The budget will reveal whether those projections proved to be accurate or whether changes have been made once the government was formed.
THE EXPECTATIONS: WHAT PEOPLE WANT
A large number of people are expecting big things from this budget. In spite of the weaker economy, Mr. Morneau has done little in recent weeks to play down those expectations. The only apparent effort to temper expectations has been in relation to aboriginal spending. Indigenous Affairs Minister Carolyn Bennett recently claimed that the previous Conservative government had “removed” $1.25-billion previously promised for aboriginal education from the fiscal framework. “I am saddened by that revelation, but we are committed to making the appropriate investments to close that gap,” Dr. Bennett told the House of Commons on March 11.
The Liberal platform was quite specific on the timing of its spending promises. The budget will reveal whether any of those promises will be delayed or cancelled.
THE ELEPHANTS IN THE ROOM: OIL AND CLIMATE
With oil prices in a deep funk, Mr. Trudeau has said “Canada will be there” for oil-rich Alberta. He has promised a fast-tracked $700-million in infrastructure funding for the province, and says he supports building pipelines to bring Alberta’s oil to market, but has steered clear of specific promises about which projects might be built. Earlier this month, a group of scientists wrote an open letter to Mr. Trudeau warning him that spending on fossil fuel-related infrastructure was a waste of money and an investment in unsustainable resources.
There are limits to how Ottawa can prop up the oil-and-gas sector, given its renewed focus on combatting climate change. Since coming back from the COP21 global climate-change talks in Paris last fall, Mr. Trudeau has been trying without success to get premiers to agree to a carbon tax, a measure that would bring billions into government coffers and push toward the emissions-reduction targets Canada agreed to in Paris. At a Vancouver meeting in March, provincial leaders agreed to the idea of carbon pricing but couldn’t agree on an approach or whether to have a national floor price.
Graphics by Tom Cardoso
With reports from Evan Annett and The Canadian Press