Economic challenges test Trudeau’s promise of more progressive path

Posted on January 10, 2017 in Governance Debates – Opinion/Editorials – A new Finance Canada report makes clear that Ottawa faces a harsh choice between unwelcome and costly cuts or politically challenging tax increases.
Jan. 9, 2017.   Editorial

Justin Trudeau came to power on the promise of more active government after a long period of austerity. Investments to stimulate growth, improve long-term economic prospects and fix our tattered social safety net – these were among the campaign commitments voters endorsed in 2015.

How would Ottawa pay for this new activism? Trudeau offered a welcome alternative to the longstanding orthodoxy of endless cuts and annual balanced budgets. The government would run deficits of up to $10 billion per year for three years before balancing the books in 2019.

Ah, the best-laid plans …

By December 2015, the Parliamentary Budget Office was warning that demographic factors and sagging commodity prices likely meant that the government would come up far short. By the middle of last year, Finance Minister Bill Morneau had abandoned any talk of a timetable for erasing the red ink. Now a new Finance Canada report projects a very different fiscal future: annual deficits through to 2050.

Trudeau’s promise of more active government without increasing taxes for most people clearly held political appeal – and most economists at the time said there was indeed both need and room for more public investment. So what is a self-proclaimed progressive government to do when the need remains, but the room has disappeared? How far does it back off its vision – and with what consequences?

That things have not worked out nearly as the Liberals predicted will of course be used as a club by small-government devotees to try to beat away Ottawa’s more progressive aspirations. Claims of fiscal mismanagement are already emerging from predictable corners. “In only one year, [the Liberals] have proved without a shadow of a doubt that they have no control of public spending,” said Conservative finance critic Gérard Deltell.

Not really. First, the factors darkening the economic outlook are largely beyond Ottawa’s control, and are certainly not the doing of a one-year-old government. Second, the fiscal situation is not as bleak as the critics claim.

To consider the sustainability of deficits in isolation from growth is misleading. As a share of the economy, the projected deficits are expected to max out at 1.1 per cent through 2050 – hardly disastrous. Moreover, federal debt is expected actually to decline as a share of GDP over the coming decades.

Nonetheless, it is no doubt true that the government can’t fund its progressive vision by racking up debt indefinitely; without the expected surpluses on which Trudeau pegged his promises the government will have to confront some very difficult choices.

Early signals suggest Ottawa may retreat. In response to the new projections, Morneau reiterated his commitment to “prudence” in health-care spending. That’s reason to worry. The provinces rejected the feds’ offer of a new funding formula that would decrease Ottawa’s already insufficient share of rising health costs, offloading risks to the provinces and ultimately to citizens. This also bodes ill for those hoping the upcoming federal budget will contain significant new investments for a range of pressing needs, from a national housing strategy to addressing infrastructure shortfalls.

There is, of course, another way – one the government seems open to exploring, but with no apparent enthusiasm. Namely, taxes.

No government wants to raise taxes. But there are modest steps Trudeau could take to relieve the fiscal pressure without great political risk, both of which he has promised.

The first: collect what’s owed. Canada currently loses tens of billions of dollars annually through tax evasion. Even if we could recoup a small portion of that, it would put a significant dent in our fiscal challenge. The second: deliver on the promise to review tax loopholes, many of which overwhelmingly benefit the rich with no obvious public utility. Morneau has vowed to find a plausible, if modest, $3 billion in savings by capping and closing the worst of these breaks. But under industry pressure, he’s done almost nothing.

In Toronto, we have seen up close the consequences of ignoring the revenue side of the tax-and-spend equation. The new Finance Canada report makes clear that Ottawa faces the same harsh choices of unwelcome and costly cuts or politically challenging tax increases. The choice this government makes will test its promise of a more progressive path.

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