With the federal budget looming, Canadian economy faces troubled waters—partially self-imposed

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Appeared in the Winnipeg Free Press, March 22, 2016

As the federal budget nears, there’s no question the Canadian economy is not firing on all cylinders. The global economic slowdown coupled with depressed commodity prices is posing real challenges for the Great White North. Unfortunately, government policies are making the economy’s troubled waters even rougher.

For instance, media reports suggest the Trudeau government’s first budget will post a $30 billion deficit—triple the amount promised in the Liberals election platform. This deficit must be put into the context of the existing debt burden being passed onto the next generation. Since 2007/08, the federal debt alone has grown by $176 billion to $692 billion in 2015/16. That’s $19,302 per Canadian. Debt ultimately must be paid back in the future through taxes and it risks endangering both our current and future prosperity.

But there’s an immediate cost. This year the federal government will spend $25.9 billion on interest payments—more than the spending on either EI benefits or the entire ministry of national defence.

And there doesn’t seem to be an end in sight, as the Trudeau Liberals seem poised to follow the approach to public finances employed by their Ontario brethren, marked by deficit spending and growing government debt. Since coming into power just a few months ago, federal deficit projections have been steadily revised upward and balanced budget targets abandoned.

Here’s the problem: once governments get into the habit of running deficits, it’s often harder than expected to return to balanced budgets. This is what happened in the 1970s, 1980s and early 1990s when the federal government ran 27 consecutive deficits. These deficits hampered Canada’s ability to enact competitive tax policies and led to a dramatic accumulation of debt, with interest payments on the debt ultimately consuming more than one-third of federal revenues.

Yet some argue deficit-financed “stimulus” spending by the federal government is necessary to help struggling energy intensive provinces like Alberta, Saskatchewan and Newfoundland & Labrador. There are two important reasons why we should be skeptical.

First, a large body of evidence-based research casts serious doubt on the ability of government stimulus spending to boost economic activity. Our own research found that the $47 billion stimulus package of previous federal Conservatives had a negligible effect on Canada’s economic turnaround in the second half of 2009.

Second, even assuming the government can deliver stimulus spending in a timely, effective manner, it’s still not an effective strategy for dealing with the type of trouble energy-intensive provinces are experiencing. Stimulus spending is meant to increase consumer demand but inadequate demand is not the primary problem in Alberta, Saskatchewan and Newfoundland & Labrador. Rather, these provinces have been hit by a supply-side shock, in the form of depressed commodity prices, that can’t be addressed through stimulus spending.

In addition, current federal policy is making a bad situation worse for Canada’s energy sector. The moratorium on oil tankers off B.C.’s North Coast, new climate change tests for proposed pipelines and LNG facilities, and the possibility of new taxes on carbon add to the considerable risk and uncertainty the industry already faces.

And it’s not just the energy patch that’s affected by poor policies. Governments across the country including the federal Liberals have introduced higher tax rates on entrepreneurs and skilled labour, making our economy much less attractive.

In Ontario, for example, the top combined federal and provincial personal income tax rate is now 53.5 per cent—sixth highest among 34 industrialized countries and second highest among G7 countries, behind only France, according to the latest available data.

Discouraging entrepreneurs, business professionals, engineers, and doctors from coming to Canada or fully using their skills once here weakens the Canadian economy. That’s why the previous two federal governments (Liberal) agreed on the need to lower tax rates on highly skilled workers.

Canada’s economy faces troubled waters, due partly to factors outside government’s direct control. Rather than make matters worse through bad policy, the upcoming federal budget is an opportunity to put forth pro-growth economic policies that will help make Canada’s economy more resilient in the face of external shocks.

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