Thursday 23 March 2017

Canada budget: nothing to see here

The Federal budget tabled by Finance Minister Bill Morneau on Wednesday was a remarkably uninspiring document.  By some calculations, new spending initiatives amounted to "only" C$ 1,3 billion, the smallest amount in living memory.  Rumours of significant tax changes targetting the wealthy proved unfounded, with the only significant changes being minor hikes in "sin taxes" and an "Uber tax" designed to ensure that ride-sharing is subject to the same sales taxes as conventional taxis.

The lack of action, at least by comparison with Morneau's first budget a year ago, prompted the Toronto Star, which never saw a deficit it didn't like, to warn the government not to "lose its nerve" on fiscal policy.  This is surely misguided advice.  Last year's budget set Federal spending on a sharply higher course than the previous Tory government had envisaged -- indeed, a higher course than most voters had expected when they supported Justin Trudeau's promise of fiscal stimulus.  That higher spending track remains intact, and is reflected in the C$ 28.5 billion deficit projected for the current fiscal year.  That's $3 billion higher than projected in the fall fiscal update, although this week's figure includes restoration of the long-established $3 billion annual "contingency",  so there is no real deterioration in the near-term outlook.

The big spending plans outlined by Morneau last year, including a boost in infrastructure spending, were always intended to roll out over several years.  That's still the case, although there is now evidence of a slightly cynical adjustment in the spending trajectory to ensure maximum impact just before the next election. The medium term deficit projections, never worth the paper they're printed on, show the shortfall only gradually shrinking, reaching $18.8 billion in 2021/22. So, pace the Toronto Star, we do not appear to be returning to Tory-style austerity.

It seems clear that the Liberals lack the political courage to take any more steps on the revenue side, having introduced a higher income tax rate for top earners a year ago.  There were rumours that the favourable tax treatment of stock options, which largely benefits the top executives of large corporations (and costs the government close to $1 billion a year) might be scaled back.  Despite pre-election pledges to do this, Morneau has kept this egregious break in place.

There were also pre-budget rumours of a change in capital gains taxation, which is currently levied at half the rate of tax on other forms of personal income.  Again, nothing, even though such a measure might have helped to rein in speculative property purchases. Indeed, Ontario's provincial Finance Minister had almost begged Morneau to enact such a measure.  Interestingly, however, the government is now collecting data on home sales as part of individuals' annual income tax filings, so in the event that they ever do decide to alter this tax, they will have a much better database to work from.

All-in-all, then, a stay-the-course kid of budget -- and that may not be a bad thing.   After all, it is still very unclear how the economic policies of the new Trump administration may affect Canada, especially in terms of a possible renegotiation of the NAFTA agreement.  Moreover, it is arguable that the economy really does not need any further government stimulus at this time.  Recent data on employment, external trade and wholesale and retail trade all suggest that the economy has picked up considerable momentum in the past half-year or so.  Better for Morneau to stay on his existing course and keep his options open, in case more action is needed in the future.

Last and very much least, the budget signals the demise of the venerable Canada Savings Bond (CSB) program, once described to me by a colleague as "the biggest goddamn Christmas club in the world".  With the costs of conventional borrowing so low, the expense of tapping individuals' savings through this program no longer make sense.  It won't be missed.

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