Federal Budget

Two days ago the federal budget was brought down while yesterday the provincial budget here in BC. The BC one was largely a snoozer. Deficit slightly lower than expected, but nothing significant thus little to write about. Does however say time to get to balance is difficult to predict and will have better handle on that next year, which I agree with. On other hand lots to digest in federal budget so below are my thoughts.

Federal budget was obviously not to my liking, but not nearly as bad as I feared. While a lousy budget, it was better than I expected. On the spending front, I was glad to see deficit lower than anticipated, but at same time think $100 billion in stimulus was totally unnecessary. Freeland claims that main reason for slow growth after Great Recession was stimulus was ended too soon. While that may be true, this recession is very different. Great Recession saw a slack in demand thus need for government to step in until it picked up. Slack in demand now is due to health restrictions, not people choosing not to spend. With household savings going up, it is likely that once enough vaccinated and we re-open; you will see a big jump in consumer spending thus making stimulus unnecessary. Sectors unaffected by health restrictions have seen growth while declines biggest in areas hit by restrictions like hospitality and tourism sector. My concern is once things re-open, economy could over heat, inflation rises and the central bank to stop this will need to raise interest rates. A rise in interest rates will cause deficits to spiral out of control, but also could lead to many household bankruptcies as Canadians have highest household debt on earth. I support spending to help those hurt by pandemic, but it should be targeted to individuals negatively impacted and hard hit sectors, not across the board.

On new program spending, Liberals decided to take a pass on UBI and Pharmacare and believe that was a wise decision as neither, especially former are affordable without major tax hikes (which were largely absent in budget, more on that later). Instead they are promising universal childcare. Certainly there are benefits to such program as will increase women in work force which is a good thing and long run may help increase birth rates which also will be beneficial with our aging population. But it is not cheap and idea it will pay for itself is based more on wishful thinking than reality. Improve growth; yes; improve it so much that it pays for itself without higher deficits, spending cuts, and or tax hikes; no. In addition it requires provinces to pay 50% of cost and with most provinces in worse financial shape, there is no way the majority can afford this. Never mind most provinces for philosophical reasons will probably oppose this. Quebec already has this while BC will likely sign on, but doubt the Prairie provinces or Ontario will. Off course this being a political document, maybe that is what Trudeau wants and hopes to be able to use that as an attack against the Tories. I believe a better solution is like BC Liberals proposed last election is means tested subsidies for childcare and also beef up UCCB as finances permit. Institutionalized 9-5 daycare doesn’t work for everyone so giving parents money so they can choose where to spend on childcare is a better option. That being said of UBI, pharmacare, and childcare, if I had to pick one, I would say childcare is best option as does more to create economic growth than other three and is least expensive. So despite my opposition to such program, I think if a new program must be established, this is preferable to other two. However as a new program with operating costs, questions still go on how will it be paid for. I can understand until federal government sees how many provinces sign up may not know, but if majority agree; taxes will need to go up. Good news is a 1% GST hike (which should be done anyways) would cover cost. Other spending initiatives was 10% hike in OAS for those over 75 which with aging population is going to be costly and while popular, bad idea. A better solution here is raise GIS as that costs less and helps mostly low income seniors instead of middle income who need it most. No increases in transfers to provinces for health care, which I have mixed feelings about. On one hand federal government has better fiscal situation than most provinces thus is more able to provide funding for this than provinces. But at same time I believe real problem is not funding but how health care is managed. I believe we should reform health care first and then if still insufficient look at increasing transfers.

Finally on taxes, nothing major. No wealth tax, no increase in capital gains inclusion, and no hike on top marginal rates. Also no GST hike or tax on principal residence, but those two are political suicide so any such hike if it happens will come after next election if Liberals win a majority. Instead all the tax hikes were ones already announced. Each of them are both small in amount of revenue raised so won’t do much to help on balancing budget, but at same time also none of them will be particularly economically damaging to growth. Until 2023, I believe it is a bad idea to raise any taxes, but once we recover, we may need to raise some. I believe a GST hike of 2 points is wisest course. A wealth tax while popular is hard to manage and hasn’t worked well in other jurisdictions. Corporate tax hikes may be feasible if Biden succeeds in raising them although I would rather we maintain our lower ones and use as a method to attract more companies to set up shop in Canada. Higher capital gains inclusion has some logic as disproportionately benefits wealthy and with corporate taxes falling, divide between dividend rate and capital gains rate has widened. At 75%, it would raise a fair bit of revenue, mostly hit top 1%, and bring capital gains closer to dividend rate. Still I believe any such raise should only be done if US raises theirs so as to not lose competitive advantage and likewise so it doesn’t hit middle class; lifetime exemption should be brought back. In addition once budget is balanced, I would offset capital gains hike by lower income tax rates like Mulroney did in 1987. Top marginal rate hikes I am off course against as I’ve explained many times. Taxes on principal residence I think is a bad idea as for many middle class Canadians as this is their primary source of wealth. At very least if done, it should only be for ones held for short periods to discourage flipping and if for longer ones, set at a very high rate so doesn’t hit middle class Canadians. Long run I would like to see taxes come down, but asides for basic adjustments I am more or less resigned to fact this not going to be realistic in near future. Instead I believe once we hit herd immunity with vaccines, government should set goal of balancing budget in 5 years.

That may be ambitious but longer you put it off, the greater the risk is of another recession and possibility finances get out of control. Balancing budget in 5 years is tough but it is doable. I would do it by holding annual spending increases to 1% a year excluding transfer payments and do a whole program review and look for $10-$20 billion in savings. In particular as civil servants retire, try to use automation to replace those jobs where possible. On tax front, raise GST to 7%, bring in a national carbon tax of $50/ton, freeze all brackets except bottom and basic minimum, raise capital gains inclusion as described above while make economic policies that will help accelerate growth. If this done, we can balance in 5 years and after that establish a policy of 1/3 of surplus for tax cuts, 1/3 for debt reduction, and 1/3 for new program spending. Its about prioritizing and doing the hard and unpleasant stuff first knowing once done we will be in better shape. Once budget is balanced, carbon tax should be made revenue neutral and brackets indexed again. Also income and corporate should be reduced as finances permit. In particular, raising basic minimum to poverty line should be top priority. For higher incomes, do tax shifting of broadening the base, getting rid of as many deductions as possible and then use that towards balancing the budget and once balanced use it to lower rates by equivalent amount. For corporate taxes, I would do same thing and use to balance budget and once balanced then lower them.

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