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John Ivison: The budget is a Liberal strategy driven by panic


It’s a glossy re-election brochure to convince voters they need to keep Trudeau to enjoy his continued generosity

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Chrystia Freeland is so averse to private enterprise, she’s now trying to put satirists out of business.

Fairness demands more investment in housing and making life cost less, the finance minister said in the opening statement of budget 2024 on Tuesday. But “it would be irresponsible and unfair to pass on more debt to the next generations,” so the rich must pay their “fair share.”

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This, remember, is a government that has run deficits every year since it was elected in 2015 and doubled the national debt in the process.

It’s a bit late — now that Ottawa spends more on interest payments than it does on health care — to claim to be squeamish about intergenerational fairness.

It smacks of “hero syndrome,” like the firefighter who commits arson or the cop who “discovers” a bomb that he planted himself.

Freeland promises to unravel the knot that she helped tie by increasing the inclusion rate from 50 per cent to 66 per cent on capital gains realized annually above $250,000 by individuals and corporations.

The budget document points out that three-quarters of Canadians will not be impacted, nor the vast majority of companies. But someone is going to pay because the new measure is expected to generate $21.9 billion in revenues over five years.

It is as if the small-business tax rate fiasco of 2017 never happened. The language and intent are just the same — namely to squeeze the rich to fund the Trudeau government’s re-election prospects — and the upshot is likely to be similarly ill-fated.

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The finance minister at the time, Bill Morneau, talked about the “privileged few” who were not paying the same rate as other Canadians. The Finance Department, which had been trying for years to stop the explosion of professionals from incorporating to shield income, said only the top one per cent of earners were targeted by the measure.

Prime Minister Justin Trudeau and Morneau embraced the “class war” rhetoric with enthusiasm, convinced that making rich people pay more was popular — just as a recent Leger poll suggests is the case today.

But the attempt backfired.

The Conservatives successfully mobilized opposition by saying convenience-store owners and farmers were being branded “tax cheats.” The Liberals were forced to backtrack, eventually offering a small business corporate tax cut that cost more than the $3 billion they were trying to raise in the first place.

A pre-budget report by Scotiabank economist Rebekah Young noted that corporate taxes have doubled in real terms over the past decade. In that same period, real GDP has grown by just 17 per cent, while program spending and the public sector have increased by 40 per cent. Spending on Indigenous programs has risen by 181 per cent since 2015 to over $30 billion a year, according to the budget.

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“The engine of sustainable sources of growth and productivity — the private sector — are still largely viewed as a means of footing the bill,” Young wrote.

A productivity agenda would exert itself to make Canada attractive for new investment. This budget has just done precisely the opposite.

The budget wrapped in the government’s response to last year’s Supreme Court decision that said much of its project-impact assessment legislation is unconstitutional. The government acknowledged that the regulatory system needs to be more efficient and quicker but then committed to a target of five years to complete impact assessments and permitting for federally designated projects. Five years. It hardly sends out a signal that Canada is open for business.

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These are desperate days for the Liberals.

They realize they are running out of time to turn things around and they want measures that will help them today.

The budget is not so much a financial plan as a glossy re-election brochure that attempts to convince voters that they need to keep Trudeau in power if they want to enjoy his continued generosity.

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Fiscal pressures have constrained those pledges to a relatively restrained $3.9 billion next year, but that is on top of the $45 billion for 2025 in measures announced since the 2021 budget. There is as much emphasis placed on ongoing efforts as on new initiatives.

The incremental impact of this spending plan is fairly modest, although it remains to be seen whether it complicates the Bank of Canada’s challenge of bringing inflation under control. The budget certainly doesn’t make governor Tiff Macklem’s life any easier, particularly with its measures designed at increasing demand in the housing market.

New inflation numbers for March released on Tuesday showed that underlying price pressures eased for the third consecutive month but Canadians grappling with mortgage or rent costs that have climbed by 25 per cent and 8.5 per cent respectively year on year will barely have noticed.

Much of the new spending was announced in the run up to the budget, including billions of dollars on housing, pharmacare, defence and AI. Of the $43 billion or so in new announcements, $29.1 billion will hit the fiscal framework over the next five years.

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The efforts to increase housing supply are imaginative but will face implementation challenges, not least of which are labour constraints. But the real problem is the time frame needed to grow the nation’s housing stock.

Hence the need for more immediate measures to drive more demand into the market by easing mortgage-lending terms. The bet seems to be that first-time buyers won’t connect worsening housing affordability with Liberal policies.

Higher revenues mean Freeland is able to meet her target of keeping the deficit below $40 billion, with the prospect that it will decline to $20 billion over the budget’s horizon, fulfilling another promise to keep deficits below one per cent of GDP by 2027.

If you accept these numbers at face value, you might be convinced that federal spending is sustainable in the medium term. But Department of Finance revenue and spending projections have been a moveable feast in recent years. Will the government really reap $22 billion from the capital gains tax increase? What about the $76 billion in contingent liabilities sitting on the government’s books — an acknowledgment of potential legal obligations to First Nations for land claims that is seven times greater than it was when Trudeau came to power?

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The government has also committed to programs like full-blown pharmacare that are not yet funded in the fiscal framework.

Freeland prefers to focus on Canada’s relative performance, where it fares well in debt and deficit comparisons with other G7 peers.

But Canada’s borrowing costs are now outpacing its economic growth and it is facing a wall of debt maturation. Next year, $228 billion worth of bonds will be issued at much higher rates and, as Young noted, Canada does not benefit from the higher market-risk tolerance afforded to reserve currency countries.

“Complacency could come at a cost down the road, especially as angst over affordability and increased productivity concerns are hitting newswires outside the country, raising questions about Canada’s long-term growth prospects,” she wrote. “Stronger growth down the road implies foregone consumption today.”

That is an alien concept to this government.

My sense is that the strategy unveiled in the budget was driven more by panic than complacency, apparent in the unfocused, scattergun nature of spending.

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The Liberals are being tuned out, so they need to create a political sonic boom by offering free school lunches, money for Sikh art exhibitions and Hellenic community centres, a new disability benefit — anything that might eke out some votes.

They know they are going in the wrong direction, but it is more important for them to wedge their political opponents than to increase investment in the economy.

When the book is finally written, it will be noted that the besetting sin of the Trudeau government was the belief that the private sector is there to be milked, rather than it being an engine capable of pulling the economy toward greater prosperity.

jivison@criffel.ca

Twitter.com/IvisonJ

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