It's Just An Economy

There were warning signs in 2015 and no one wanted to see them:

Justin Trudeau may be gone, but the economic consequences of his fiscal approach, chronic deficits, rising debt costs and stagnating growth, are still weighing heavily on Canada.

Before becoming prime minister, Justin Trudeau famously said, “The budget will balance itself.” He argued that if expenditures stayed the same, economic growth would drive higher tax revenues and eventually outpace spending. Voila–balance!

But while the theory may have been sound, ...

(Sidebar: wait - what?) 

... Trudeau had no real intention of pursuing a balanced budget. In 2015, he campaigned on intentionally overspending and borrowing to build infrastructure, arguing that low interest rates made it the right time to run deficits.

This argument, weak in its concept, proved even more flawed in practice. Post-pandemic deficits have been horrendous, far exceeding the modest overspending initially promised. The budgetary deficit was $327.7 billion in 2020–21, $90.3 billion the year following, and between $35.3 billion and $61.9 billion in the years since.

 Those formerly historically low interest rates are also gone now, partly because the federal government has spent so much. The original excuse for deficits has vanished, but the red ink and Canada’s infrastructure deficit remain.

For two decades, interest payments on federal debt steadily declined, falling from 24.6 per cent of government revenues in 1999–2000 to just 5.9 per cent in 2021–22, thanks largely to falling interest rates and prior fiscal restraint. But that trend has reversed. By 2023–24, payments surged past 10 per cent for the first time in over a decade, as rising interest rates collided with record federal debt built up under Trudeau.

Rising debt costs are only part of the story. Federal revenues aren’t what they could have been because Canada’s economy has stagnated. Population growth pads our overall GDP growth stats, but masks our productivity problem. From 2014 to 2022, Canada had near-lowest GDP growth among 30 countries in the Organization for Economic Co-operation and Development. Canada’s average growth rate during that period (0.6 per cent) was only ahead of Luxembourg (0.5 per cent) and Mexico (0.4 per cent).Why should a country like Canada, so blessed with natural resources and know-how, do so poorly? Capital investment has fled because our government has made onerous regulations, especially hindering our energy industry.

**

Thank you, Herr Carney:

In May, Prime Minister Mark Carney proudly announced a new bill to “deliver tax relief for Canadians by reducing the lowest marginal personal income tax rate from 15% to 14%, effective July 1, 2025.

The government news release went on: “Nearly 22 million Canadians are expected to benefit from this measure. The middle-class tax cut would reduce the tax rate that is applied to the first $57,375 (in 2025) of an individual’s taxable income, regardless of their income level.”

The government claims that an individual could save as much as $420 and a couple up to $840 in 2026. This is naturally welcome news for beleaguered taxpayers. However, the reality is likely to differ from the announced measures.

The Parliamentary Budget Officer (PBO), Yves Giroux, states that the maximum saving a couple will receive will be $750, not the $840 the government says. That $750 is the maximum amount a couple can expect to benefit from this bill. That works out to $14.42 per week for that couple. Again, this is the maximum amount.

The news for lower-income Canadians is even less inspiring. The PBO says that the lowest-income bracket Canadians will save $90 a year. That’s $1.73 a week, not even the price of a medium double double.

To compound the illusion that this tax break will have a significant benefit for taxpayers, as income levels rise due to the tax reduction, some non-refundable tax credits will be reduced. Once again, these figures come from the PBO. Giroux’s office says the actual cost in revenue to the government will be $9.5 billion but that loss will be offset by the clawing back of $4.2 billion in non-refundable tax credits. Those clawbacks come from the same taxpayers who are supposed to benefit from the tax relief promised by Carney in May.

Canada’s tax structure renders us uncompetitive with our southern neighbours. Despite the challenging political climate these days, we have lost enormous amounts of brain power to lower-taxed jurisdictions in the United States over the years. Carney’s tax break will do little to make us a more attractive place for higher-income earners or budding entrepreneurs.

Making matters worse for the federal government is what House Leader Steven MacKinnon admits is a “deficit issue that needs to be dealt with.” With a budget due in November, the Carney government is going to be faced with how to reduce Canada’s reliance on borrowing in order to fund its various programs.

 **

Just weeks before the federal government is set to table the budget, the country’s fiscal outlook has Canada “at the precipice,” according to interim parliamentary budget officer Jason Jacques.

In the latest economic and fiscal outlook, Jacques estimates the Liberals will post an annual deficit of $68.5 billion this year, up from $51.7 billion dollars last year. The interim PBO also projects that the federal debt-to-GDP ratio — one of the government’s fiscal anchors — will increase over the medium-term, and remain above its pre-pandemic level.

In an interview with CTV Question Period airing Sunday, Jacques told host Vassy Kapelos that his analysis “raises significant concerns” about the “sustainability of federal finances.”

Asked what that means in layperson’s terms, Jacques said while Canada hasn’t “gone over the precipice,” it’s “looking out over the cliff.”

“We’re at a point where, based upon our numbers, things cannot continue as they are, and I think everybody knows that,” Jacques said, adding his report contextualizes the anxiety some Canadians are feeling about the economy right now.

 

Don't worry, however.

The government knows how to look after itself:

The National Research Council is budgeting millions to renovate a vacant library into an “engaging workplace” with an atrium, staff gymnasium, “wellness rooms” and an executive suite for Mitch Davies, its $377,500-a year president. Notices to contractors were issued Friday, only days after the Prime Minister instructed federal agencies to earmark unused property for public housing: “Our people make big things possible.”