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Economic Insight Cautious federal budget a missed opportunity for the Liberals

Waiting on U.S. tax reform is a complacent approach from Mr. Morneau, Willis writes.

Chris Wattie/REUTERS

The highlight of this week's federal budget might have been Finance Minister Bill Morneau's choice of footwear. He stepped out in new Oxfords from trendy Edmonton-based designer Poppy Barley.

Once you got past the shoes, it was a forgettable budget. There were no major spending initiatives and no new taxes. The government opted for a wait-and-see exercise, an approach dictated by one leader, and that wasn't Prime Minister Justin Trudeau.

The federal Liberals opted to tread water until U.S. President Donald Trump weighs in with a detailed U.S. economic plan. Fraser Institute executive vice-president Jason Clemens summed it up by saying: "The Finance Minister decided not to decide until Trump decides."

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What exactly are we waiting for? While no one can predict what Mr. Trump is going to do day by day, or tweet by tweet, the overarching U.S. economic strategy is crystal clear. The Republicans are committed to deep cuts in U.S. personal and corporate-tax rates.

While the U.S. public is deeply divided on much of what its President is doing, investors have endorsed how Mr. Trump takes care of business. U.S. stock benchmarks have posted double-digit gains since the U.S. election.

The Liberals' cautious approach amounts to a missed opportunity.

There is much that could be have been accomplished in this budget to meet the Finance Minister's oft-stated goal of making the Canadian economy more innovative and competitive. Waiting on U.S. tax reform is a complacent approach from Mr. Morneau, a former chief executive who understands that a sense of urgency, fuelled by healthy paranoia, is a proven path to success. A better Canadian budget, one to boost business confidence, would have moved forward on three fronts: Roll back taxes, roll out infrastructure spending and outline a plan to eliminate deficits over time.

On taxes, after months of speculation that further hikes were in the works, the Liberals kicked the can down the road, announcing the government is still studying how to close tax loopholes for business owners. Mr. Morneau did subsequently make it clear that rumoured increases in capital gains tax were off the table. But in the run-up to the budget, the Liberals also indulged in bashing the rich, pointing out in presentations that compensation increases for the wealthiest 1 per cent of Canadians outstrip the raises earned by the bulk of workers. The signal sent to entrepreneurs and CEOs: We're not done raising your taxes.

"We see evidence that capital is being allocated on the expectation of higher taxes," said the Fraser Institute's Mr. Clemens. He said: "People are sitting on their hands, rather than investing. Business leaders can manage risks, but they cannot manage uncertainty."

High-income Canadians are taking home less of what they make after last year's tax hikes, and when government levies of all stripes are added up, even the middle class that the Liberals pledged to support is seeing paycheques get whittled away. This budget saw tax credits eliminated, and comes after carbon taxes were imposed in jurisdictions such as Alberta and Ontario. Tax trends are heading in the wrong direction, according to Mr. Morneau's predecessor. Former finance minister Joe Oliver said: "You increase Canada's competitiveness by lowering tax rates, particularly if this is the stated goal of your major trading partner."

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Rather than attracting investment by cutting corporate and individual taxes, the budget showered money on a few favoured sectors such as agri-food, advanced manufacturing and digital technology, in hopes that today's startup will be tomorrow's global champion. While innovators in these sectors may well create great companies, Mr. Clemens said governments of all stripes consistently struggle to pick winners and "the government's focus should be on getting the fundamentals right."

On infrastructure, critics say the Liberals are moving at a sluggish pace and failing to deliver projects that will benefit the economy as a whole. Avery Shenfeld, chief economist at CIBC World Markets Inc., said: "The government admitted they are behind schedule, and they need to tighten the timing of infrastructure spending."

The Liberals also need to ensure money spent on infrastructure actually benefits business. "You can't build bridges to nowhere," said Mr. Oliver. "You have to build infrastructure that brings about growth, such as the bridge we are building from Windsor to Detroit."

For every dollar the federal government commits to infrastructure, the Fraser Institute calculates just 11 cents is spent on projects that help business run better: the bridges, ports and highways that most of us picture when the word is used. "The bulk of the government's spending is on green and social infrastructure, projects such as social housing, community centres and hockey arenas," Mr. Clemens said. "They are unlikely to provide productivity gains."

Finally, there are deficits. On the campaign trail, Mr. Trudeau pledged prudence. Borrowing would peak at $10-billion, he promised, and the books would be balanced by the next election. Now, the Liberals project the government will run a $28.5-billion deficit in 2017-18, and continue to be in the red for the foreseeable future.

In an attempt to change the subject, the Finance Minister has switched the government's focus from deficits to keeping debt at levels deemed appropriate to the size of the economy. Craig Wright, chief economist at Royal Bank of Canada, said: "The government should reintroduce a target for balancing the budget, as the commitment to lowering the debt-to-GDP ratio that replaced the balance target is more difficult to control and less stringent."

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Canada is riding an economic hot streak that dates back to the pro-growth, small-government, low-deficit policies of Jean Chrétien and Paul Martin. The country deftly avoided the great recession that ripped through the United States and Europe, and outside a battered but recovering energy sector, this generation of Liberal leaders inherited an economy that's humming along, with 2-per-cent increase in GDP forecast for 2018. It's fine to take pride in our sunny ways, but dangerous to be complacent. Outside the spiffy Oxfords, this federal budget was unremarkable at a time the country deserves better.

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