(Ottawa) After the plethora of announcements in recent weeks, we expected a boom in the federal deficit, literally. However, this is not the case, Chrystia Freeland’s deficit remains stable at “only” 40 billion dollars.
How on earth was the Minister of Finance able to stabilize her deficit despite the avalanche of new spending? Yes, okay, some are spread over several years or postponed to future years, such as those to equip the army. But otherwise ?
Essentially, Mme Freeland achieves this thanks to two sources: new taxes levied on the “rich” on their capital gains, on the one hand, and more generous tax revenues thanks to the absence of recession, on the other hand.
Don’t look for big spending cuts. The minister plans to reduce the public service, of course, but it will only be from next year, and then by a meager 1.4% over four years, through attrition. This year, its level of spending reached 17.9% of GDP, a high not seen in 28 years, excluding the two pandemic years.
More precisely, the budget adds 11.6 billion in new spending to the current year (2024-2025). There is money for indigenous people (3.0 billion), for housing (1.6 billion), for student loans and grants (1.1 billion), to boost productivity (1.1 billion ) and to subsidize electric vehicles (0.6 billion), among others.
These new expenses are financed in 2024-2025 by the new tax on capital gains (6.9 billion) and by more generous tax revenues (3.9 billion) offered by a more favorable economy, essentially.
In short, the 2024-2025 deficit, which was forecast at 38.4 billion last fall, will instead reach 39.8 billion. It will remain at the same level next year before gradually falling to 20 billion within four years… if we trust the budget forecasts.
The minister played tricks to suddenly inflate her revenue by 6.5 billion with the increase in capital gains tax.
How ? By encouraging taxpayers targeted by the measure – individuals and businesses – to rush transactions before June 25 so that only 50% of their capital gain is taxed rather than 66.7%. This type of gain affects stocks on the stock market as much as chalets or income properties.
This tight deadline could double the usual volume of transactions among individuals by the end of June, estimates tax expert Stéphane Leblanc of Ernst & Young. Even more so if the provinces, as is always the case, harmonize their own measures with the federal government.
By the way, this harmonization could allow Minister Eric Girard, in Quebec, to pocket around 1 billion and deflate his own deficit, estimated at 11 billion… Did he expect that?
For 24 years, remember, only 50% of the capital gains of individuals and corporations has been taxed in Canada, compared to 100% for work income. Historically, this benefit has been granted to capital gains to encourage investment and the economy, on the one hand, and to offset the effects of inflation on investments, on the other hand1.
Minister Freeland considers her new tax to be fair. On the one hand, it only targets 40,000 Canadian individuals per year and 12.6% of businesses, according to the budget. These companies are often holding companies owned by professionals (doctors, lawyers, etc.), in which passive income accumulates.
On the other hand, wealth inequalities, which are affected by capital gains, are greater than income inequalities. In Canada, the richest 1% pocket 13.4% of income, but own 24.9% of wealth.
Critics will say that this measure is used at the last minute by Freeland to reduce its deficit, since it is unable to clean up its expenses. The measure will harm productivity, some say, creating an unfriendly climate for investment.
To silence this speech, Mme Freeland at the same time reduces the tax on capital gains for entrepreneurs, which is clever. This parallel measure, however, costs 10 times less than what the increase in the inclusion rate to 66.7%…
Out of control, Ottawa’s finances? Not if we rely on the precise targets set last fall, during the economic statement, and which most experts called for.
According to this budgetary anchor, the deficit for the year which ended March 31, 2024 should not exceed 40.1 billion. And subsequently, the deficit expressed as a percentage of GDP was expected to decline until it fell below 1% of GDP in 2026-2027, in two years.
However, the figures presented on Tuesday suggest that these targets will be achieved. First, the 2023-2024 deficit is 40 billion (1.4% of GDP), a hair below the maximum 40.1 billion promised.
And subsequently, the deficit gradually goes from 1.3% of GDP to 0.9% of GDP in two years and to 0.6% of GDP in four years… if we rely on the budget forecasts.
For those who are concerned, note that the budget projects that economic growth in Canada will be only 0.7% in 2024 and 1.9% in 2025, after inflation, which is in line with private sector forecasts. However, very recently, the strict Bank of Canada adjusted its forecasts to 1.5% in 2024 and 2.2% in 2025.
Let’s hope that the federal government will use this possible leeway to balance its budgets… but let me doubt it?
1– For individuals, be aware that it is not the entire capital gain that will be taxed at 66.7% from June 25, but only the portion of the gains that exceed $250,000. That said, for individuals and businesses alike, the gain that will be taxed at two-thirds will be whether the investment was made in 2005 as in 2023.