Liberals’ 2022 federal budget ‘spend, tax and pray’ without 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 consolation long-term fiscal outlook in the budgetwhich foresees steady economic and productivity growth that will further reduce Canada’s debt burden over the next 30 years.

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

Liberals correctly diagnose the deep-seated economic problems facing Canada that threaten to plunge this country into a less prosperous, low-wage future. Increasing global competition for capital, a persistent underinvestment from the private sector, and the resulting sluggish productivity growth are enormous challenges the budget acknowledges.

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

The government even nods to a recent report from the Organization for Economic Co-operation and Development that puts Canada last in potential economic growth through 2060. And Ms. Freeland framed the issue well, saying it all It boils down to ensuring that the next generation of Canadians “has a more prosperous life than ours.”

It’s just that the government isn’t proposing any policy change that would alter Canada’s projection of last place in that critical economic race.

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

There are many expenses, in an ever-growing list of initiatives. Higher taxes await the financial sector and the oil patch, without broad-based tax relief.

And as for the sentence, that’s the optimism built into the government’s short-term economic assumptions, flowing into 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 percent above its average since 2008.

There are some measures that brush the edges of Canada’s investment, productivity and growth problem.

Enhanced tax credits for the extraction of critical minerals needed for electric vehicle batteries will have some impact. But what happens after those minerals are extracted from the ground? The budget is silent on how to increase private sector investment where the money and jobs and higher wages really are, not just turning those minerals into batteries and putting those batteries in vehicles, but creating the intellectual property to invent new green technologies.

As for broader changes, the budget proclaims the government’s intention to “undertake a review of new ways of building innovative businesses.” So, there is a plan to come up with a plan, at some point.

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

It will certainly be good news for small business owners looking to grow a little bigger. But that move doesn’t address the main challenge for Canada’s economy, that is, clearing the way for mid-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 additional employees, but it’s not what the country needs to drive innovation and productivity growth.

Then there are the policies that seem to be summoning the spirits of 1970s-style economic interventionism: the Canada Growth Fund, whose mission is to “attract substantial investment from the private sector” to reduce greenhouse gas emissions, diversify the economy in new and traditional sectors and to support the restructuring of supply chains. One question: what is outside of your mandate?

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

What remains unexplained is how those new agencies will avoid replicating the struggles of their growth and innovation philosophical predecessors, the infrastructure fund and the supercluster program. And left unexplored is the irony that Ottawa has launched a “market-oriented” government agency instead of figuring out how its policies stand in the way of a private sector and targeting accordingly.

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

The big budget measures are on the spending side. National child care will boost the size of the workforce and the economy, though it will do little for productivity growth, even in the best of times. (And the budget forecast of a slight decline in debt levels does not include the billions of dollars that a national pharmaceutical care program or increased health transfers to the provinces would cost.)

Still, those are at least actions the government is taking. On several key issues, liberals are simply promising to strategize at some later point. That is the case with a new framework for intellectual property. Work is also underway on a revision of the fiscal regime that supports scientific research and experimental development.

And there is also a review of a perennial competitor in innovation policy: the reduction of interprovincial trade barriers between provinces. Ottawa says it is “committed to providing leadership” to reduce such barriers.

There is no shortage of big ideas outside of government that liberals could have appropriated: a radical reshaping of intellectual property policy to capture the riches of innovation is one example. Boosting cash transfers to provinces on the condition that they lower trade barriers is another. Nothing with an ambition of that scale appears in the budget.

Instead, there are forecasts that seem to be based on a sentence and the assumption that Canada’s productivity problems will simply go away on their own.

Long-term projection of the federal debt

the balloon and the mail, source: federal budget 2022

Long-term projection of the federal debt

the balloon and the mail, source: federal budget 2022

Long-term projection of the federal debt

the balloon and the mail, source: federal budget 2022

The budget provides a long-term view of the federal debt landscape, showing a decline in the pandemic debt glut over the next 30 years. By fiscal year 2055-56, net debt as a percentage of gross domestic product will have shrunk to just 16.5%, about a two-thirds drop from the 46.5% projected for the current fiscal year. That’s a marked improvement over last year’s budget, when the same projection envisioned a debt-to-GDP ratio of more than double, to 38.7%, by mid-century.

The brighter picture is not due to a fundamental improvement in Canada’s economic performance. Instead, there is a short-term, inflation-driven revenue increase that gives the government a head start in reducing the debt burden. Indeed, the Finance Department cut its long-term labor productivity growth estimate to 1 percent from 1.2 percent last year. Even that is still well above the post-2008 average of 0.8 percent for labor productivity.

That may seem like a quibble about fractions. But it does mean that Ottawa thinks the country’s workforce will become 25 percent more productive, somehow. That kind of leap implies an economic revolution and a commitment to big ideas. Instead, liberals advocate old-school incrementalism. And a review.

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