A panel of tax and fiscal policy experts is urging the Liberal government to be up front with Canadians on the eventual cost of its big-ticket spending promises, such as a new national child-care program, warning that it could lead to a two-point increase in the GST.
The C.D. Howe Institute’s fiscal and tax working group, which is co-chaired by former Saskatchewan finance minister Janice MacKinnon and former federal finance minister John Manley, was created this year to provide policy advice to governments during the COVID-19 pandemic. The group includes more than a dozen economists and former senior government officials.
In their latest report to be released Friday morning, the panel notes that the Liberal government’s September Throne Speech signalled that in addition to emergency pandemic measures, the government has promised permanent spending on a range of new programs.
The government has not yet released projected costs of these promises, nor has it said how it will pay for them.
In an interview, Ms. MacKinnon said citizens must recognize the programs will come at a cost.
“People, I think, are not facing the reality that if you want more long-term spending on permanent programs, only broadly based tax increases that affect the average taxpayer will pay for them,” she said.
Finance Minister Chrystia Freeland will release an economic and fiscal update on Monday that will shed new light on the government’s spending plans. The Globe and Mail reported this week that the update is expected to focus on short-term pandemic measures, while providing a general sense of how much Ottawa is prepared to spend on some of the more expensive items promised in the Throne Speech.
It is also expected to outline the government’s argument as to why the planned emergency spending, as well as future stimulus spending, is fiscally sustainable over the longer term.
Details on measures such as stimulus spending, child care and pharmacare are not expected to be released until next year’s budget, or possibly later.
The C.D. Howe report estimates that after excluding time-limited pandemic measures, the permanent spending promises referenced in the Throne Speech could cost between $19-billion and $44-billion a year in permanent program spending.
After reviewing a range of potential tax hikes to pay for this, the report suggests the most effective option from a tax policy perspective would be to raise the goods and services tax by two percentage points and to increase the capital gains inclusion rate to 75 per cent from 50 per cent. The report estimates that these two measures would raise nearly $20-billion, or about 0.9 per cent of GDP.
“Taxpayers and policy makers should not underestimate the scale of tax increases needed if Ottawa increases spending as much as envisioned in the Speech from the Throne,” the report states.
Raising the GST to 7 per cent from 5 per cent would reverse the two-point GST cut approved under Conservative prime minister Stephen Harper. Prime Minister Justin Trudeau has not signalled an interest in raising the GST. Instead, the Liberal government’s September Throne Speech hinted at other potential measures for raising tax revenue.
The Throne Speech said the government will “identify additional ways to tax extreme wealth inequality, including by concluding work to limit the stock option deduction for wealthy individuals at large, established corporations, and addressing corporate tax avoidance by digital giants.”
The C.D. Howe report notes that Canada’s tax revenue mix is out of sync with its peers. Member countries of the Organization for Economic Co-operation and Development impose a personal income tax burden of 8.3 per cent of GDP on average, while Canada’s is higher at 12 per cent. At the same time, OECD countries collect 9.6 per cent of GDP on average from consumption taxes like the GST, while Canada is below average at 5.9 per cent.
Child-care advocates argue that a new national child-care program would essentially pay for itself, by creating direct jobs to provide the service while boosting the work force participation rate, particularly among women.
A report released this month by economist Jim Stanford, which was commissioned by the advocacy organization Child Care Now, estimated such a program would boost combined federal and provincial tax revenues by between $17-billion and $29-billion a year.
“This would be more than enough to cover the total costs of a national early learning and child care program,” Mr. Stanford wrote.
Ms. MacKinnon said a child-care program would produce an economic benefit, but said she strongly disagrees with advocates who say it will pay for itself.
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