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Jack Mintz: David Dodge wasn't wrong, this federal budget is 'one of the worst in decades'

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David Dodge, former deputy finance minister and governor of the Bank of Canada, said before the 2024 federal budget was presented that it would “likely be one of the worst in decades.” He wasn’t wrong. The budget Finance Minister Chrystia Freeland delivered Tuesday fails to address the biggest problem currently facing Canada — our declining standard of living.

It is very irritating to hear the Trudeau government congratulate itself for Canada’s economic growth over the past few years without pointing out that all of it has come from immigration. Factor out population growth and Canada’s real GDP “growth” per capita has been negative 2.5 per cent — a number mentioned nowhere in the budget. Even Carolyn Rogers, deputy governor of the Bank of Canada, recently called our weak economic performance an economic emergency — and bank officials are always extremely careful about their choice of words.

Stumbling in her new shoes, Minister Freeland has taken three steps backward in this budget. She is running up federal spending by 10 per cent over the next two years. From fiscal years 2022-23 through 2025-26, the government’s financing requirements will have grown by 61 per cent while the interest it is paying on its debt will be up 57 per cent. She is also taking the wrong path by raising taxes on the private sector rather than cutting federal spending.

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In what it bills as an “affordability” budget, the federal government is spending oodles of money on housing, dental care, school lunches, pharmacare, Indigenous support, green subsidies and, of course, consultants’ fees and a padded public service. To finance all the new spending, it will issue still more bonds, which will push up interest rates even as the Bank of Canada tries to bring them down. Higher corporate and capital gains taxes will discourage the supply of goods and services to the market whether in housing starts or in food. Instead of improving affordability, the fiscal plan will impair it.

Even though the government finally got the message that it has made a mess out of immigration, its new spending programs and regulatory changes to encourage housing supply won’t keep up to demand. Even with temporary residents held to five per cent of the population over three years, population growth will be almost one million a year, down from 1.5 million, but still outstripping GDP growth and new housing starts.

If we want to reverse our slide in economic performance, we need to revitalize private-sector investment. The minister of finance clearly believes the path to greatness comes via more spending on green subsidies, housing and accelerated depreciation — though this last not for the entire economy but only in a few limited areas chosen by the government (i.e., rental housing, patents, data processing and software). The budget doesn’t mention that accelerated depreciation, introduced by Bill Morneau in 2018, is being phased out by 2028 for most investment. That will have a much bigger impact on the economy than anything done in this budget and not a happy one.

Philip Bazel at the University of Calgary has estimated the likely effect of the phasing-out of accelerated depreciation on tax rates on corporate investment. He finds that the effective tax on new non-residential investment will rise from 15.7 per cent in 2023 to 20 per cent in 2028 when accelerated depreciation is fully phased-out. That’s a tax increase of 27 per cent. Its effect will be to reduce Canada’s non-residential capital stock by $23 billion (5.3 per cent), which is not a small number. The potential job loss associated with this decline in investment is 950,000.

In previous budgets, Ottawa has increased corporate taxes on finance and insurance companies. This budget announces it will be adopting the new OECD global corporate minimum tax, which will also raise taxes on the largest corporations. That’s not going to help economic growth. Yes, its green tax preferences will encourage investment in clean energy, but many of its other policies, including the carbon tax, have discouraged investment in many other industries by raising energy prices well above those in the United States. The net impact of these policies is to reduce GDP this decade.

On top of these earlier tax increases, Minister Freeland is now increasing the tax rate on capital gains for individuals, corporations and trusts. Instead of taxing half of capital gains, the government will now tax two-thirds of gains, and for individuals, in excess of $250,000. For a large corporation, and assuming the provinces follow suit, the capital gains tax rate will rise from 13 per cent to 17.4 per cent. For trusts and individuals, the tax rate rises from about 26.5 per cent to 35.5 per cent.

Ottawa expects to take in $10.6 billion in revenues under the corporate tax and another $8.8 billion under the personal tax over five years. Don’t hold your breath. Since capital gains are only realized when an asset is sold, taxpayers will minimize tax by deferring asset disposals, smoothing asset sales to keep below the threshold or using financial derivatives to avoid the tax.

There is nothing redeeming about this form of capital gains tax hike. It will discourage personal and corporate investment at a time when other taxes on investment are rising. Administering it properly is highly complex. And it is unfair. Those middle-income taxpayers who have capital gains from selling assets once or twice through their lifetime (for instance, when they sell a cottage) could be taxed more heavily than wealthier Canadians who sell assets year by year to keep below the threshold. The government should go back to the drawing board.

I rate this budget with a big “F,” well below how my students are doing this exam season. The main reason for this failing mark? It does nothing to address what the sober-minded officials at our own central bank have declared an “economic emergency.”