Fiscal ‘snapshot’ long on pages, short on ideas

Recovery requires a robust plan, write Niels Veldhuis and Milagros Palacios.

According to the Oxford English Dictionary, a snapshot is “a short description that gives you an idea of what something is like.” When the Trudeau government delivered its Economic and Fiscal Snapshot 2020 on Wednesday, it was anything but.

At 168 pages, the “Long-Winded Economic and Fiscal Update” might have been a more appropriate title. While lengthy in volume, it was unfortunately short on substance, particularly about the future of government finances and the government’s plans to tackle its $343-billion budget deficit. As such, this federal government continued its record of fuelling uncertainty.

In difficult times, workers, businesses, investors and entrepreneurs crave certainty, particularly with respect to government policy. With a deficit of $343 billion this year (which follows $89.1 billion in total deficits since 2015), there’s a real risk of higher taxes in the immediate future. Without a plan of how the government will deal with the state of federal finances, workers, investors, businesses and entrepreneurs are left guessing about whether taxes might be raised, and by how much. This uncertainty means that investments that might look profitable today might not be so in a near future with higher taxes. This kind of uncertainty means that businesses, investors and entrepreneurs will take a wait-and-see attitude toward potential investments.

This government has a record of creating policy uncertainty. Even prior to the COVID-19induced recession, deficits created uncertainty about future taxes, aiding rumours of potential increases to capital gains taxes and limits on interest deductibility for business. New subjective regulations for major projects created uncertainty about how and if new infrastructure projects would be approved. And earlier this year, the government’s indecisive handling of the #ShutDownCanada movement and ensuing rail blockades created yet more uncertainty, not to mention significant economic damage.

Nick Bloom, professor of economics at Stanford University, and Steven Davis, a professor of economics at the University of Chicago, developed the first rigorous analytical framework for measuring the extent and impact of policy uncertainty. Data for Canada show an increasing trend of policy uncertainty over the past five years, with many periods of uncertainty eclipsing that of the 2008/09 recession. Currently, policy uncertainty is at a 35-year high in Canada.

To be fair, federal Finance Minister Bill Morneau clearly understands that we live in uncertain times. During his “snapshot” speech, which to his credit was actually quite short, the minister noted that “businesses of all sizes are still facing uncertainty.” The actual snapshot document, which mentions “uncertain” or “uncertainty” 35 times, also notes that “Businesses drastically reduced investment … in response to large revenue losses and high uncertainty.”

Unfortunately, the Trudeau government seems oblivious to how it creates policy uncertainty rather than reducing it.

The need for increased certainty is why during the Great Recession of 2008/09, the then-Conservative federal government produced an Update of Economic and Fiscal Projections (which was only 24 pages long) and included updated forecasts for revenues, spending and the deficit for the current year and the following five-year period. Canadians could see the government had a plan to get the budget, which was $56 billion in deficit, back to near balance, without tax increases.

Clarity and certainty are critically important, now more than ever. With its snapshot, the Trudeau government missed an opportunity to reassure workers, businesses, investors and entrepreneurs that an attack on capital through tax increases was not coming. It missed an opportunity to show it would return to budget balance, or at least close to it, without massive tax increases. And it missed an opportunity to end long-running rumours of capital gains tax increases, limits on interest deductibility and additional taxes on stock options.

If this government is serious about Canada’s economic recovery, it would prioritize key reforms central to economic growth, including a robust plan to reduce the deficit and balance the budget, improving tax competitiveness for individuals and businesses, and easing the regulatory burden to get the conditions right for investment and entrepreneurship.