Budget 2016—Liberals high on pro-growth rhetoric, low on pro-growth policies
Heading into their first budget, the Trudeau Liberals talked a lot about setting the foundations for long-term economic growth. In fact, the need for pro-growth policies was a central theme of the party’s election platform.
And the Liberals are right: promoting stronger economic growth should be a central goal of any government, as it contributes to rising incomes, growing opportunities, and sounder fundamentals for the future. Since taking office, however, the Liberals have made policy choices that will generally impede long-term economic growth rather than promote it. Today’s budget provides several discouraging examples.
Let’s start with the fact that the new budget calls for the federal government to rack up a tremendous amount of debt in the coming years. Specifically, it calls for a $29.4 billion deficit this year alone and projects an increase in total federal debt of approximately $113 billion over the next five years. Unfortunately, the budget does not provide a plan to bring the budget back to balance during the government’s first mandate, as was promised during the election.
The consequence of this fiscal plan will be heightened uncertainty for entrepreneurs, investors and businesses. Sustained government borrowing increases the risk of tax hikes in the future, dampening the viability of current investment while endangering our future prosperity. Under these conditions, business and entrepreneurs will increasingly stay on the sideline or decide to invest in other jurisdictions with more predictable business environments.
In addition to ballooning debt over the next several years, the budget confirms a major policy change that will make it harder for future governments to balance their books with changes to the Old Age Security (OAS) program. Specifically, the Liberals will undo the Tories scheduled increase in the age of eligibility from 65 to 67 effective in 2029.
The reform was premised on a need to rein in spending on OAS, which is funded from annual general revenues rather than a dedicated fund and will come under increasing cost pressure as the population ages. Reversing this prudent reform means future OAS costs will be higher than had been expected. Some combination of cuts in other spending, higher taxes, and/or increased borrowing will be needed to finance these expenditures—none of which improve the long-term potential of our economy.
On tax policy as well, the Liberals have made policy choices that run counter to their stated desire to encourage long-term growth. Here, the Liberals (prior to the budget) created a new top personal income tax rate for entrepreneurs and highly skilled workers, increasing the top rate from 29 to 33 per cent.
The combination of this tax increase with similar increases in provincial rates means that six of 10 provinces now have tax rates on entrepreneurs and skilled labour in excess of 50 per cent. Ontario, for example, has the second highest tax rate of any G-7 country on entrepreneurs and skilled labour.
As both the previous Conservative and Liberal governments have acknowledged, Canada needs lower personal income tax rates—not higher—to attract, retain, and encourage entrepreneurship and investment. It’s hard to see how the decision to raise the top tax rate will work to this end.
A genuinely pro-growth approach to economic policy would centre on maintaining competitive tax rates and providing a stable economic environment unthreatened by burgeoning debt. Instead, the budget proposes to ramp up spending under the notion that we can spend our way into prosperity. In fact, in 2016/17 alone, program spending is projected to increase by a remarkable $20.5 billion, a 7.6 per cent jump. As a result of big spending increases, the budget projects that the size of the federal government (measured by program spending as a share of the economy) will grow from 12.9 per cent in 2014/15 to 14.6 per cent by 2017/18.
The problem is that evidence-based research shows that increases in government spending in both the short term and long term tend not to boost economic activity. The notion that deficit-financed spending in the years ahead (when the economy is not even in recession) will contribute significantly to economic growth does not square with the evidence.
The Liberals claim that this additional spending is driven partly by investments in infrastructure that will help drive long-term growth. And it’s true that sound infrastructure investments can help drive future growth.
The problem is that much of what the government is calling “infrastructure investment” is actually spending on projects that are unlikely to do much to improve productivity. For example, the government is committing to spend approximately a third of its new infrastructure spending on “social infrastructure” such as housing and cultural or recreational centres. As the former Governor of the Bank of Canada, David Dodge, recently pointed out, this type of social infrastructure is “a consumption item,” noting that “It may need to be done for social reasons, but it’s not going to be growth-enhancing in the way that investment in transportation infrastructure or innovation would be.”
In advance of the budget, the Liberals were right to emphasize the need for policies that promote long-term economic growth. Unfortunately, today’s budget shows a clear gap between the policies they are pursuing and their rhetoric about fostering long-term economic growth.