(OTTAWA) As the federal government prepares its spring budget, experts say the Liberals should consider tougher spending rules and tax hikes to improve the state of public finances.
This budget, due in two weeks, comes at a time when the Liberal government is under pressure to limit spending so as not to row against the Bank of Canada’s initiatives to curb inflation.
The central bank has aggressively raised interest rates over the past year in an effort to rein in consumer and business spending. Excessive government fiscal stimulus could undo some of these efforts.
Canada could also experience a recession this year that would affect government tax revenues. Faced with these challenges, Finance Minister Chrystia Freeland assured that her government was committed to fiscal responsibility. “I am very aware that we are preparing this budget at a time of significant budgetary constraints,” she said last week, days before announcing that the budget would be tabled on March 28.
But experts admit that to be truly fiscally responsible, the Liberals will have to make tough choices that may not be politically expedient or advantageous in the short term.
Former Parliamentary Budget Officer Kevin Page says there is a political bias that drives governments to choose deficits over tax hikes. He believes the current government has been “rightly criticized for pursuing a relatively loose fiscal policy,” resisting pressure to put in place tougher fiscal targets.
These fiscal targets, or anchors, are spending rules that guide the government’s decisions on public finances. Mr. Page, who currently directs the Institute of Fiscal Affairs and Democracy in Ottawa, explains that these fiscal anchors help protect governments against the temptation to borrow more and more.
The current government’s fiscal anchor over the medium term is to reduce the amount of 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 Asselin, senior vice-president of policy at the Business Council of Canada, believes that the current government’s budgetary anchoring is not adequate. Instead, he advocates capping public debt financing based on a percentage of gross domestic product (GDP).
Tax increases or decreases?
Conservative leader Pierre Poilievre criticizes the Liberal government’s spending spree, accusing it of being the cause of inflation. On the eve of the next budget, he is calling on the Liberals to cap spending by pledging to match every new spending dollar with cuts elsewhere in public finances.
The leader of the Conservative opposition also wants tax cuts, which would further widen the deficit if the government does not reduce its spending at the same time.
Asked what should be cut in program spending, Poilievre cited the CBC/Radio-Canada budget, the use of private consultants and the government’s promised buyout of what the Liberals call “weapons.” assault type fire”.
But some public policy experts advocate higher taxes or fees instead, since government revenue is part of the fiscal responsibility equation.
A shadow budget recently released by the CD Howe Institute comes to the same recommendation, suggesting an increase in the GST. “One of the primary motives behind this shadow budget is to ensure that Canadians who have benefited from massive pandemic-related federal spending should help pay for it,” the economic think tank report said.
Robert Asselin, who was budget director for former Liberal finance minister Bill Morneau, argues that for the past 20 years, successive governments have hesitated to raise taxes.
But the federal government cannot continue to finance its spending by posting deficits, he believes. “At a certain point, he either cuts his expenses or he increases his income. »
Given the long-term challenges related to the green transition and other priorities of this government, Mr. Page also thinks that it might be time to start talking about tax increases.
The federal government should announce major investments in the “green transition” in this budget. These measures are intended to maintain Canada’s global competitiveness in light of the significant investments made by the United States last summer under the Inflation Reduction Act.
“As a government, we truly believe there is an historic window opening in Canada right now to build Canada’s industrial economy of the 21ste century,” said Minister Freeland last week.
Although these measures can involve large expenditure commitments, economists generally note that such investments can pay dividends for the economy.
However, Page cautions that these investments should be kept separate from other spending decisions, as they have different effects on the economy and inflation.