Experts predict tax hikes in budget as Trudeau government stretches to pay for its promises
Sources say the Liberals are anxious to avoid anything that might prevent interest rate cuts
Economists and experts say they're expecting the federal government to raise taxes in Tuesday's budget to help offset billions of dollars in new spending already promised in the pre-budget announcements that have been landing almost daily since the end of March.
Those announcements add up to more than $38 billion in commitments over a number of years. Because $17 billion of those commitments involve loan-based programs, about $21 billion could hit the government's bottom line directly.
And that figure doesn't include other new budget measures 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 revenues to pay for new spending 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 sustainable," said Robert Asselin, senior vice president of policy at the Business Council of Canada and an adviser to Bill Morneau when he was finance minister. He is also a former adviser to Prime Minister Justin Trudeau and former prime minister Paul Martin.
Freeland has said repeatedly the government will not raise taxes on the middle class.
"The problem for them is either a surtax on big corporations or a wealth tax sounds very good, but in practice they're terrible. They don't work," said Asselin.
Asselin said the government could also "reprofile" previous spending commitments 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 reputation when it comes to actually 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 high-income 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 responsibility. He said that's the signal the Bank of Canada 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 non-inflationary way?"
Adding to the pressure on Ottawa is the recent trend of provincial governments spending big, notwithstanding 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 inflation in check any more difficult. They also say they know they have little chance of turning around their sagging political fortunes unless interest rates come down sooner rather than later.
Inflation numbers coming soon
Coincidentally, the latest inflation numbers from Statistics Canada will come out on Tuesday. While the consensus expectation is that core inflation will remain flat, there's always a chance of a surprise bump, as seen in the United States' March numbers.
"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 foreign exchange and payments company.
The three pillars of Tuesday's budget will be housing and affordability, growing the economy and fiscal responsibility, according to senior government sources.
But some economists argue that the growth and fiscal responsibility pillars have been promised in the past, with little evidence of either follow-through or success.
And with the Liberals sagging in the polls and struggling 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 fortunes around.
"It will be 100 per cent absolutely a political budget, a pre-election budget," said Asselin.
"This government has a fiscal credibility problem. They over-promise and they under-deliver."
Tuesday's budget is also expected to be geared toward younger Canadians, such as millennials and Generation Z — a group of voters the Liberals are actively courting, according to sources. The flurry of housing announcements over the past two weeks has hinted at that focus.
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