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Federal fiscal policies ‘sustainable’ over long term, says new PBO report

By Marco Vigliotti      

The PBO's projections showed that the federal government could increase spending or cut taxes annually by roughly $13-billion, or 0.6-0.7 per cent of the GDP, over the next 37 years and still maintain fiscal sustainability.

A new report from the Officer of the Parliamentary Budget Officer, headed by Jean-Denis Fréchette, pictured, projects that the federal government could increase spending or cut taxes annually by roughly $13 billion dollars, or 0.6-0.7 per cent of the GDP, over the next 37 years and still maintain fiscal sustainability. The Hill Times photograph by Andrew Meade
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Parliament’s fiscal watchdog is giving a major vote of confidence in the Trudeau government’s spending and taxation plans.

In a new report released Tuesday, the Parliamentary Budget Officer Jean-Denis Fréchette concluded that current federal fiscal policies are “sustainable” over the long term, pointing to new projections showing the deficit plummeting from 30 per cent of the country’s GDP in 2022 to only 6.5 per cent in 2055.

The PBO’s projections also showed that the federal government could increase spending or cut taxes annually by roughly $13-billion, or 0.6-0.7 per cent of the GDP, over the next 37 years and still maintain fiscal sustainability.

“Beyond the medium term, the tax burden under current policy is maintained such that revenues grow in line with nominal GDP, while spending on programs is determined by demographic and economic projections, consistent with current government policy parameters,” reads the report, titled “PBO and Finance Canada Long-term Projection Comparison.”

In the trim assessment, the PBO compares its long-term projections for federal finances and economic growth with estimates from Finance Canada, finding the two are largely in lock-step, with some minor variances.

The PBO’s projection of real GDP growth hovers between 0.1 and 0.2 per cent lower than estimates from Finance Canada over the 2017 to 2055 time period dissected in the report, with the PBO projecting slower growth in labour supply and labour productivity.

However, both the PBO and Finance Canada project the federal budgetary balance to gradually increase over the next decades under the current fiscal framework, emerging from a deficit of roughly half a percentage point of the GDP in 2022 to a surplus of more than one per cent in 2055.

Finance Canada is projecting the budget balance to rise from 0.5 per cent to 1.7 over that span, while the PBO is estimating a more modest rise of 0.4 to 1.3 per cent.

In a statement, Chloé Luciani-Girouard, press secretary for Finance Minister Bill Morneau (Toronto Centre, Ont.), said the report supported the government’s claim that its fiscal plan is sustainable, though cautioned that the figures are intended to serve as projections, not forecasts, and did not consider “future policy decisions” that could be made by Ottawa.

“We will continue to grow the economy by investing in the middle-class and in the skills and technology that will make Canada more productive, competitive and fair which is why we are doubling down on our plan to help the middle class and those working hard to join it, by strengthening the Canada Child Benefit, cutting taxes for small businesses, and putting more money in the pockets of low-income working Canadians,” she said in a statement.

The federal Conservatives and NDP did not respond to requests for comment prior to deadline.

The federal Liberals were elected in 2015 on a platform that promised to run “modest” deficits of less than $10-billion to devote more resources to building infrastructure, in hopes of stimulating the Canadian economy.

However, once in power, the Liberals posted a larger than anticipated deficit of $17.8-billion in 2016-17, projected an estimated shortfall of $28.5-billion in 2017-18, and backed off previous commitments to balance the budget in time for the next vote in 2019.

Stronger than anticipated economic growth allowed the Liberals to revise the projected budget deficit for the 2017-18 fiscal year downward to $19.9-billion, with the ratio of debt to GDP now forecast to tumble to 29.5 per cent by 2020-21, and to 28.5 per cent by 2022-23, which, if achieved, would be the lowest level since 1977, according to the government.

On the revenue side, the Liberal government has cut taxes for middle-class earners ($45,000-$90,000) from 22 to 20.5 per cent, and created a new higher bracket of 33 per cent for those making more than $200,000 a year, as promised in campaign literature. 

The Liberals, though, generated controversy last summer by proposing changes to the tax code aimed at restricting the tax savings generated from incorporation, including adding a reasonableness test to assess the appropriateness of certain shareholders in private corporations. Some high-income earners become incorporated to divvy up their income to family members listed as shareholders in order to drop themselves into lower tax brackets, a practice known as income sprinkling.

The changes would also restrict the use of private corporations to make investments in items like stocks or real estate, unrelated to the business entity, known as passive investments. Under a revised proposal released last fall, the tax changes would only apply to passive investments exceeding an annual income of $50,000.

A PBO report released last fall determined that changes to passive investment rules could reap an additional $1 billion for Ottawa in the first few years, before increasing to as much $4 billion in 10 years, and $6 billion in 20 years.

The government is framing the measures as ways to close unfair loopholes that allow the wealthy to skirt tax obligations, but business advocacy groups are warning that they will have major consequences on small-business owners.

While the fiscal picture may appear rosier for the federal government, the PBO is continuing to raise alarm bells about the level of consolidate debt shouldered by the provinces, territories, and municipalities.

The spending watchdog said these subnational governments would collectively have to implement annual tax increases or spending reductions of $19-billion, or 0.9 per cent of the GDP to “achieve fiscal sustainability” over a 75-year span.

mvigliotti@hilltimes.com

The Hill Times 

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