(OTTAWA) As the federal government prepares its spring budget, experts say liberals should consider tightening spending rules and raising taxes to improve the state of the public finances.
The budget, due in two weeks, comes at a time when the Liberal government is under pressure to curb spending so as not to run counter to the Bank of Canada’s initiatives to curb inflation.
The central bank has raised interest rates dramatically over the past year in an effort to rein in consumer and business spending. Excessive government fiscal stimulus may undo some of these efforts.
Canada could also experience a recession this year that would affect government tax revenues. In the face of these challenges, Finance Minister Chrystia Freeland emphasized that her government is committed to fiscal responsibility. “I am very aware that we are preparing this budget at a time when you are seeing significant budget constraints,” she said last week, days before the budget was announced on March 28.
But experts acknowledge that to be truly fiscally responsible, liberals will have to make tough choices that may not be politically expedient or beneficial in the short term.
Former parliamentary budget officer Kevin Page says there is a political bias that drives governments to choose deficits over tax increases. He believes the current government has been “rightly criticized for pursuing a relatively loose fiscal policy”, as it has resisted pressure to set tougher fiscal targets.
These fiscal targets, or anchor points, are the spending rules that guide the government’s fiscal decisions. Mr. Page, who currently directs the Institute of Finance and Democracy in Ottawa, explains that these fiscal anchors help protect governments from the temptation to borrow more and more.
The current government’s fiscal pillar in the medium term is to reduce the size of the debt relative to the size of the economy – the “debt-to-GDP ratio”. The Liberal government has also pledged to cut its pandemic-related spending.
Robert Aslin, senior vice president for policy at the Business Council of Canada, believes the government’s current budget support is insufficient. Instead, it calls for a cap on public debt financing based on a percentage of GDP.
Tax increase or decrease?
Conservative Party leader Pierre Poilievre has criticized the Liberal government’s spending spree, accusing it of being the cause of inflation. On the eve of the next budget, the Liberals have called for a spending cap by pledging to match every new spending dollar with cuts elsewhere in the public finances.
The opposition Conservative Party leader also wants tax cuts, which will widen the deficit further if the government does not cut its spending at the same time.
Asked what should be cut in program spending, Poiliffry cited the CBC/Radio-Canada budget, the use of special advisers, and the government’s promised acquisition of what the Liberals call “weapons”.
But some public policy experts advocate higher taxes or fees instead, because government revenue is part of the fiscal responsibility equation.
The CD Howe Institute’s recently released shadow budget came in on the same recommendation, suggesting a GST increase. “One of the main drivers behind this shadow budget is to ensure that Canadians who have benefited from the massive federal spending related to the pandemic should help pay for it,” the Economic Research Center report said.
Over the past 20 years, successive governments have hesitated to raise taxes, says Robert Aslin, who was budget director for former Liberal finance minister Bill Morneau.
But he believes the federal government cannot continue to fund its spending by paying the deficit. “At a certain point, he will either cut his expenses or increase his income.”
Given the long-term challenges surrounding the green transition and other priorities of this government, Mr. Page also thinks it might be time to start talking about tax increases.
The federal government should announce significant “green transition” investments in this budget. These measures are intended to preserve Canada’s global competitiveness in light of the significant investments the United States made last summer under the Inflation Reduction Act.
“As a government, we truly believe that there is a historic window opening in Canada right now to build Canada’s industrial economy into the 21st centuryH century,” Minister Freeland said last week.
Although these measures can involve large spending commitments, economists generally note that such investments can pay off for the economy.
However, Page warns that these investments should be kept separate from other spending decisions, as they have different impacts on the economy and inflation.
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