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Deputy Prime Minister and Minister of Finance Chrystia Freeland responds to a question during a weekly news conference on Feb. 27 in Ottawa.Adrian Wyld/The Canadian Press

Economists are warning that tax hikes are on the table in Tuesday’s federal budget as Finance Minister Chrystia Freeland seeks to square the circle of tens of billions in new spending announcements and a promise to not push the deficit any higher.

In a bid to win back the millennial and Gen-Z voters who delivered the minority Liberals their last two election wins, the federal government has unveiled a raft of new spending and loan initiatives aimed at addressing that demographic’s most pressing concerns: affordability and the housing shortage.

The political push has come with a hefty price tag. In the two weeks leading up to the budget, the government has already announced more than $38-billion in new initiatives, $17-billion of which is through loan programs. That figure does not include the $10.7-billion over five years announced last week for a new defence policy.

The budget is expected to largely focus on three main themes: housing, affordability and economic growth. And still more spending is expected to be revealed on Tuesday. The government has not yet laid out the funding for its new pharmacare program. Nor has it funded the long-awaited disability benefit. Despite that, Ms. Freeland has repeatedly insisted that it can all be accounted for within the government’s fiscal targets set last fall in the economic statement.

That included three specific pledges: keep the size of the deficit for the fiscal year that ended March 31 to below $40.1-billion; lower the debt-to-GDP ratio in 2024-25 and keep it on a declining track thereafter; and keep annual deficits below 1 per cent of GDP in 2026-27 and beyond.

“We are committed to adhering to those guideposts,” Ms. Freeland said at a press conference last week.

To do that, private sector economists say the government’s options include spending cuts elsewhere, accounting for the new spending by spreading it out over several years, raising taxes or some combination of these. Given the minority Liberals’ propensity to spend, their track record on breaking previous fiscal goals, and past challenges finding efficiencies in the federal purse, many expect the government will have to raise taxes.

The Finance Minister has fuelled that speculation in large part by refusing to rule out such measures on industries and the wealthy.

Last week, she reminded reporters that the government has previously raised taxes on the wealthy to give a tax cut to the middle class. She said her government’s credo in 2015 was “supporting the middle class and those working hard to join it” and it hasn’t changed since then.

“Our belief is we need to invest in middle-class Canadians, support middle-class Canadians and we will not be raising taxes on the middle class,” Ms. Freeland said at the Thursday news conference.

Derek Holt, Bank of Nova Scotia vice-president and head of Capital Markets Economics, said that “in plain speak,” this means others face tax hikes. “Freeland basically said ‘Yes there will be some forms of tax hike,’ if you read between the lines,” he said in a Friday note.

Bank of Montreal senior economist Robert Kavcic was less declarative than Mr. Holt but in a recent note said a wealth tax and targeted corporate tax changes “would be on brand for the current government.”

Meanwhile Canadian Imperial Bank of Commerce chief economist Avery Shenfeld pointed out last week that the government has already set the precedent for such a move with a previous decision to impose higher taxes on large financial institutions. He argued that such a move would run counter to Liberal pledges to improve Canada’s productivity.

Robert Asselin, senior vice-president of policy at the Business Council of Canada and a former economic adviser to the Trudeau government, said he believes “there’s no other way” for the government to meet its fiscal goals set just a few months ago.

“It’s obvious that they are not cutting anything significantly on the expenses side and so they will need these revenues to meet these targets. This is what we’re really worried about,” he said.

Brian Ernewein, who spent more than 35 years in the Finance Department’s tax policy branch and is now a senior adviser with KPMG, echoed the concerns from CIBC, telling The Globe and Mail that tax increases could run counter to efforts to boost economic growth and productivity.

The government’s balancing act in the Tuesday budget will also factor in concerns that excessive government spending will fuel inflation and delay any rate cuts from the Bank of Canada. Already the public-sector spending has not made the central bank’s job any easier.

Ontario and Quebec missed earlier deficit targets, while British Columbia’s budget was followed by a credit downgrade by one rating agency – S & P – while another agency, Moody’s, lowered its outlook for B.C. to negative.

Mr. Asselin said this year’s series of provincial budgets have increased spending, which works at cross-purposes with the Bank of Canada’s efforts to cool inflation. That leaves Ottawa will even less room, he said, to increase spending without interfering with Governor Tiff Macklem’s efforts to get inflation under control.

In an interview with The Globe, Mr. Macklem noted the provinces have increased spending in recent months. For example, he pointed out that since January the growth in projected government spending has gone from 2.25 per cent to 2.75.

“That difference is largely those provincial budgets,” he said. “It’s not making it any easier to get inflation down to our 2-per-cent target.”

He declined to speculate on what the federal government’s Tuesday budget might do to further increase public-sector spending.

“We’re all going to get the budget [on Tuesday]. We’re all going to read it carefully. We’ll have another conversation after that.”

With a report from Mark Rendell

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