Liberals’ 2022 federal budget ‘spend, tax and pray’ devoid of bold growth measures

Finance Minister Chrystia Freeland leaves a caucus meeting on Parliament Hill in Ottawa on Wednesday, April 6, 2022.Sean Kilpatrick/The Canadian Press

There is the comforting long-term fiscal picture of the budget, which projects stable economic growth and productivity, further reducing Canada’s debt burden over the next 30 years.

And then there’s the fiscal framework – devoid of any bold economic measures that could turn that long-term projection into reality.

The Liberals correctly diagnose the deep-rooted economic problems facing Canada that threaten to plunge this country into a low-wage, less prosperous future. An intensification of global competition for capital, a persistent lack of private sector investment and the resulting sluggish productivity growth are enormous challenges that the budget recognizes.

“This budget is about economic growth today, tomorrow and for decades to come,” Finance Minister Chrystia Freeland told reporters on Thursday.

The government is even giving a nod to a recent report by the Organization for Economic Co-operation and Development that ranks Canada last in terms of potential economic growth through 2060. The next generation of Canadians “will have a more prosperous than ours.

It is simply that the government is not proposing any policy overhaul that would change the projection of Canada’s last place in this critical economic race.

Rebekah Young, director of fiscal and provincial economics at Scotiabank, described the government’s approach as “spend, tax and pray”.

There’s a lot of spending, on an ever-growing list of initiatives. Higher taxes await the financial sector and the oil sector, without widespread tax relief.

And when it comes to prayer, it’s the optimism built into the government’s near-term economic assumptions that carries over to its overly optimistic outlook for the next 30 years. Instead of proposing measures to boost labor productivity, for example, the government simply assumes that it will suddenly rise 25% above its average since 2008.

Some measures attack the contours of Canada’s investment, productivity and growth problem.

Improving tax credits for the extraction of critical minerals, needed for electric vehicle batteries, will have some impact. But what happens once these minerals are mined from the ground? The budget is silent on how to increase private sector investment where the money, jobs and higher wages really are. This means not only turning those minerals into batteries and installing those batteries in vehicles, but creating the intellectual property to invent new green technology.

In terms of broader changes, the budget proclaims the government’s intention to “undertake a review of new ways to create innovative businesses”. So, there is a plan to arrive at a plan, at some point.

Similarly, modest changes are being made to the taxation of small businesses. Currently, small businesses pay a reduced rate of 9% on the first $500,000 of taxable income, which is significantly lower than the general corporate tax rate of 15%. But this favorable treatment ends when a company’s capital employed in Canada reaches $15 million. The budget proposes to raise that threshold to $50 million, with estimated tax savings of $660 million over five years, starting in the 2022-23 fiscal year.

This will undoubtedly be good news for small business owners looking to grow a bit more. But this measure does not address the main challenge of the Canadian economy, namely to pave the way for medium-sized companies to become large companies and for large companies to become world leaders. A slightly larger local construction company will be nice for owners and extra employees, but it’s not what the country needs to shake up innovation and productivity growth.

Then there are policies that seem to summon the spirit of economic interventionism in the style of the 1970s: the Canada Growth Fund, whose mission is “to attract substantial private sector investment” to reduce greenhouse gas emissions, diversifying the economy into new and traditional sectors. sectors and to support the restructuring of supply chains. A question: What is not within its mandate?

The government also proposes to create the Canada Agency for Innovation and Investment, with funding of $1 billion over five years. It would be a “market-driven innovation and investment agency”, details of which will be announced later this year.

It remains to be seen how these new agencies will avoid replicating the struggles of its philosophical growth and innovation predecessors, the infrastructure fund and the superclusters program. And remains unexplored the irony that Ottawa is launching a “market-oriented” government agency rather than understanding how its policies hinder the private sector and orienting itself accordingly.

Of course, there is sufficient funding for the hoped-for transition to a greener economy. But the reality is that jobs in the green economy are likely to be less productive, not more so, than those in the fossil fuel industry, increasingly blocked by this government.

The major measures of the budget relate to spending. National child care services will increase the size of the labor force and the economy, though they will contribute little to productivity growth, even at the best of times. (And the budget’s forecast of slightly lower debt levels doesn’t include the billions of dollars that a national pharmacare program or larger health transfers to provinces would cost.)

Yet these are at least measures taken by the government. On several key issues, the Liberals are content to promise to come up with strategies at a later time. This is the case of a new framework for intellectual property. A review is also underway for the tax regime that supports scientific research and experimental development.

And then there’s the examination of a perennial contender in innovation policy – ​​the reduction of interprovincial trade barriers. Ottawa says it is “committed to showing leadership” to reduce these barriers.

There is no shortage of great ideas from outside government that the Liberals could have appropriated: a radical overhaul of intellectual property policy to capture the riches of innovation is one example. Increasing cash transfers to the provinces on the condition that they lower trade barriers is another. Nothing ambitious of this magnitude appears in the budget.

Instead, there are predictions seemingly based on a prayer and an assumption that Canada’s productivity problems will simply go away on their own.

Long-term projection of the federal debt

the globe and mail, source: federal budget 2022

Long-term projection of the federal debt

the globe and mail, source: federal budget 2022

Long-term projection of the federal debt

the globe and mail, source: federal budget 2022

The budget takes a long-term view of the federal debt situation, showing a decline from the pandemic debt binge over the next 30 years. By fiscal year 2055-56, net debt as a percentage of gross domestic product will have contracted to just 16.5%, down nearly two-thirds from the 46.5% projected for the fiscal year in Classes. This is a marked improvement over last year’s budget, when the same projection predicted a debt-to-GDP ratio more than twice as high, at 38.7%, by mid-century.

The better picture is not attributable to a fundamental improvement in Canada’s economic performance. Instead, there is a short-term inflation-induced increase in income that gives the government a head start on reducing the debt burden. The Department of Finance has actually cut its estimate of long-term labor productivity growth to 1% from 1.2% last year. Even that remains well above the post-2008 average of 0.8% labor productivity.

This may seem like quibbling over fractions. But that means Ottawa believes the country’s workforce will become 25% more productive, one way or another. This kind of leap involves an economic revolution and a commitment to big ideas. Instead, liberals are proposing old-fashioned incrementalism. And a review.

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