The Trudeau government will acknowledge this week that its tax hike on the richest Canadians won't cover the entire cost of its promised tax cut for the middle class, adding to the fiscal pressures on coming federal budgets, sources said.
Finance Minister Bill Morneau is set to announce changes to federal tax brackets in the coming days, at the same time as he will confirm that Ottawa is rolling back the maximum annual contribution to tax-free savings accounts to $5,500, from $10,000. Both changes are scheduled to take effect Jan.1.
The measures were key parts of the Liberal Party's election platform, and are now the legislative priority as the House of Commons sits for one week ahead of the holiday break.
The Liberals had promised the lost revenue from their "middle-class tax cut" would be offset by a new tax bracket for income of more than $200,000. But economists have since raised questions about the Liberal Party's numbers, which are magnified by new forecasts that show an increasingly negative picture of Ottawa's fiscal situation. Instead of inheriting a balanced budget, the Liberals argue the government was already in the red when it took office, before it even started to implement ambitious spending plans and the tax cut.
Mr. Morneau said he will present the costs and benefits of the tax changes when he introduces them this week. While he refused to tip his hand over the past few days, federal sources confirm the numbers do not balance, which will add to government deficits in coming years.
"There are going to have to be some adjustments around the margins," a senior federal official said.
Still, the official said the numbers are not as bleak as those presented by the C.D. Howe Institute, which predicted a multibillion-dollar shortfall.
Billing it as a middle-class tax cut, the Liberal government has vowed to reduce the tax rate on income between $44,701 and $89,401 to 20.5 per cent, from 22 per cent. It will also introduce a new tax rate of 33 per cent on income above $200,000, representing the top 1 per cent of income earners. The party has estimated these two measures will offset, meaning the tax hike would generate $3-billion in revenue and cover the $3-billion revenue cost of the tax cut.
The C.D. Howe Institute, by comparison, estimated last week the tax increase will actually raise less than $1-billion.
And in an open letter to the Prime Minister, the Canadian Council of Chief Executives has critictized the shift as ineffectual.
"Higher marginal rates may bring in revenue in the short term, but ultimately they encourage tax avoidance and undermine Canada's international competitiveness," CCCE president John Manley said.
Liberal House Leader Dominic LeBlanc said in an interview the tax measures and the TFSA change will be announced simultaneously to allow taxpayers to adjust before they come into effect at the start of the new tax year. The Liberal government's plan to end income-splitting for families will be formally announced next year, along with the creation of the promised Canada Child Benefit.
Mr. LeBlanc added that the House will spend much of its time this week debating the Throne Speech, giving a number of rookie MPs a chance to make their "maiden speech" in Parliament. In addition, there will be a vote on Thursday on the cost of resettling 25,000 Syrian refugees by the end of February.
But economic issues stand to occupy much of the debate in Ottawa. The Parliamentary Budget Officer warned last week that Liberal assumptions for economic growth are "optimistic," suggesting the government is counting on billions in future revenue that may not materialize.
Speaking after the Speech from the Throne, Mr. Morneau said his government is banking on increased federal spending to stimulate Canada's economy. He added that the middle-class will "invest" the proceeds of the tax cut in the economy, predicting it will stimulate growth across the country.
"We'll continue to be prudent in the face of all of our challenges and make sure we need to make responsible investments but we're going to stay on the course of working to enhance growth to deal with the slowing economy," the Finance Minister said.