Experts predict tax hikes in budget as Trudeau government stretches to pay for its promises
Economists and experts say they're expecting the federal government to raise taxes in Tuesday's budget to help offset bil‐ lions of dollars in new spending already promised in the pre-budget an‐ nouncements that have been landing almost daily since the end of March.
Those announcements add up to more than $38 bil‐ lion in commitments over a number of years. Because $17 billion of those commit‐ ments involve loan-based programs, about $21 billion could hit the government's bottom line directly.
And that figure doesn't in‐ clude other new budget mea‐ sures that haven't yet been announced.
Finance Minister Chrystia Freeland has said the deficit will not increase in this year's budget. Canada's economy has so far avoided recession, but growth is still slow. That leaves the government with no option but to increase rev‐ enues to pay for new spend‐ ing while keeping the deficit steady.
"I'm pretty confident they will raise revenues because they've squeezed themselves on their fiscal situation and they continue to commit to spending that is not sustain‐ able," said Robert Asselin, se‐ nior vice president of policy at the Business Council of Canada and an adviser to Bill Morneau when he was fi‐ nance minister. He is also a former adviser to Prime Min‐ ister Justin Trudeau and former prime minister Paul
Martin.
Freeland has said repeat‐ edly the government will not raise taxes on the middle class.
"The problem for them is either a surtax on big corpo‐ rations or a wealth tax sounds very good, but in practice they're terrible. They don't work," said Asselin.
Asselin said the govern‐ ment could also "reprofile" previous spending commit‐ ments by pushing the promised money further into the future, but that won't be enough to keep the deficit in check. And it would worsen the Liberals' spotty reputa‐ tion when it comes to actual‐ ly getting things done.
"Let's be honest. They have to raise taxes. I don't think that's a big secret. But can they do it in a thoughtful, provocative way?" said James Thorne, chief capital market strategist for Wellington Altus Private Wealth.
"If you do it on the highincome people, they're just going to move their money offshore."
Making room for rate cuts
Thorne said the number one priority for the government should be to show fiscal re‐ sponsibility. He said that's the signal the Bank of Cana‐ da needs before it can lower interest rates, which would offer Canadians cost-of-living relief and lift the economy.
"Nobody is arguing about the social programs that the Liberals are putting in," he said. "But can we do it in a fiscally responsible and noninflationary way?"
Adding to the pressure on Ottawa is the recent trend of provincial governments spending big, notwithstand‐ ing the impact on inflation or aggregate government debt levels.
Government sources say the Liberals are very keen not to make the Bank of Canada's job of keeping infla‐ tion in check any more diffi‐ cult. They also say they know they have little chance of turning around their sagging political fortunes unless in‐ terest rates come down sooner rather than later.
Inflation numbers com‐ ing soon
Coincidentally, the latest in‐ flation numbers from Statis‐ tics Canada will come out on
Tuesday. While the consen‐ sus expectation is that core inflation will remain flat, there's always a chance of a surprise bump, as seen in the United States' March num‐ bers.
"If we get anything like the U.S. surprise, it would look rather scandalous that the government is looking to push a lot of money into the economy," said Karl Schamotta, chief market strategist with Corpay, a for‐ eign exchange and payments company.
The three pillars of Tues‐ day's budget will be housing and affordability, growing the economy and fiscal responsi‐ bility, according to senior government sources.
But some economists ar‐ gue that the growth and fis‐ cal responsibility pillars have been promised in the past, with little evidence of either follow-through or success.
And with the Liberals sag‐ ging in the polls and strug‐ gling to get their message through to voters, many predict this federal budget will be less about the nation's finances and more about measures that could turn the government's political for‐ tunes around.
"It will be 100 per cent ab‐ solutely a political budget, a pre-election budget," said As‐ selin.
"This government has a fiscal credibility problem. They over-promise and they under-deliver."
Tuesday's budget is also expected to be geared to‐ ward younger Canadians, such as millennials and Gen‐ eration Z - a group of voters the Liberals are actively courting, according to sources. The flurry of hous‐ ing announcements over the past two weeks has hinted at that focus.