Federal finances to go deeper into red; $14-billion in support for business in face of U.S. tax cuts, fall update shows

The Liberal government is forecasting bigger deficits in the near future as the country heads closer to an election in which big government spending is expected to be a hot-button issue. In Finance Minister Bill Morneau’s (Toronto Centre, Ont.) fall economic statement—a full 156 pages long—government numbers show that projections on annual deficits between 2019-20 and 2022-23 will be between $600-million and $1.9-billion higher than forecasted in last February’s budget. The forecasts in the last budget have been revised to reflect accounting changes to pension liabilities, which now cover past, present, and future years. The deficit projection for the current fiscal year, however, is lower by $700-million, taking into consideration the accounting changes. But in 2019-20, the deficit is forecasted at $19.6-billion. Canada’s debt-to-GDP ratio, meanwhile, is predicted to gradually lower from 30.9 per cent this year to 28.5 per cent in 2023-24. This decline is in line with projections in last February’s budget. The revised forecasts come as the Trudeau government has received criticism from Conservatives and some economists over its decision to finance big program spending with borrowed money. Some economists have said such stimulus spending ought to be reserved for periods of economic shock. The Conservatives have hammered the Liberals over its election promise to run deficits of $10-billion or less; the government has since broken that promise. The Liberals, meanwhile, have touted spending, particularly on infrastructure, as necessary for growing the country’s economy. Since last February’s budget, more spending has been added to the government’s bottom line, as a result of measures to provide businesses and workers relief due to U.S. tariffs on Canadian steel and aluminum exports. It has also provided more funding for the purchase of new icebreakers and for the renewal of Canada’s NATO mission in Europe, among other items. A major spending add were costs for the federal carbon-pricing plan, totaling more than $1.5-billion between now and 2022, though the fall update stated that such figures are likely to be lower due to accounting revisions and the fact that revenues from fuel charges are to be returned to the provinces where the federal backstop applies. New spending was also announced in the fall economic update, including support for Canadian businesses anxious that corporate tax cuts in the United States has hurt their competitive advantage. Total costs for these new announcements, which also include financing for charities and news publications, total $2.75-billion over six years. In a speech in the House of Commons today, Mr. Morneau defended his decision to provide accelerated capital cost allowances over arguments by Corporate Canada that he should cut the broad-based corporate tax. “Some have lobbied us to match those measures,” he said, “If we were to do that, it would add tens of billions in new debt.” “It would do more to worsen income inequality in Canada than improve it.” However, the fall update projects that support for businesses will cost more than $14-billion between now and 2024. Higher projected revenues, compared to what was forecasted in the last budget, will help to offset the new costs. Annually, over the next five years, revenues are expected to be almost $5-billion higher, mainly coming from increased revenues from corporate and personal income taxes. The fall update stated that such revenues come from an improved economic outlook, despite expectations that the global economy will somewhat cool off after several years of growth. Revenues are expected to increase from $328.9-billion in 2018-19 to $396.7-billion in 2023-24, an increase of 20.6 per cent. On the expenses side, Finance Canada expects costs to increase but is offset by rosy revenue projections. While the government is expected to see decreases in transfer payments to persons, particularly on EI benefits due to lower unemployment, direct program expenses are expected to increase by $2.7-billion this fiscal year. Economists, particularly at the University of Ottawa's Institute of Fiscal Studies and Democracy—which is headed up by former Parliamentary Budget Officer Kevin Page—have questioned whether Finance Canada's revenue and expense projections are realistic given expectations the economy will slow down and skepticism government spending will stop growing. The current PBO, Yves Giroux, put out a Oct. 23 report that predicted the budget deficit would be $19.4-billion in 2018-19. Other highlights: Canada’s response to U.S tax cuts Ottawa will provide Canadian firms accelerated capital-cost allowances, giving businesses the ability to write off the full cost of machinery and equipment used for manufacturing or the processing of goods, as well as for certain clean-energy equipment. Under current tax rules, businesses usually must write off capital costs—such as the purchase of new equipment or a building—over a number of years during which there is an expected return on the investment. The federal government also plans to create an “accelerated investment incentive,” which will allow every business—regardless of size and sector—to write off a larger share of the cost of newly acquired assets in the year the investment is made. For example, firms can write off 30 per cent more for new motor vehicles purchased. The new incentives are expected to cost $4.8-billion in the 2019-20 fiscal year and gradually decrease to an annual cost of $1.36-billion in 2023-24. In the lead-up to the fall update, Mr. Morneau hinted at targeted measures to assist businesses that have lost their tax advantage following corporate tax cuts passed by the U.S. Congress in late 2017. Corporate Canada had hoped the fall update would provide Mr. Morneau a good opportunity to trim the broad-based corporate tax rate. The Parliamentary Budget Officer, however, had indicated in its Oct. 23 report that investment levels stayed the same in the first half of 2018 despite the U.S. tax cuts. This is despite a Business Council of Canada report that concluded the advantage the Americans had with the cuts, which were championed by President Donald Trump, would kill Canadian jobs and hurt the country’s GDP due to the level of investment going instead south of the border. For years, Canadians firms paid less corporate taxes and enjoyed the benefits of a lower “marginal effective tax rate,” which gauges the tax burden on new investments. Finance Canada says the measures will lower the marginal effective tax rate from 17 per cent to 13.8 per cent, which would provide businesses in Canada the lowest rate among G7 countries. The U.S. rate currently sits at 18.7 per cent. New ‘Social Finance Fund’ In a surprise move, the federal government also announced the creation of a fund to support charities and non-profit organizations. Mr. Morneau has earmarked $775-million over 10 years for the fund, which is meant to provide such organizations “financing to implement their innovative ideas.” The fall update noted that this program will connect them with private-sector investors, providing a further $50-million to set up such a hub. It stated that the program could generate up to $2-billion in new economic activity, and create as many as 100,000 jobs. Money for news outlets Three initiatives to support the struggling news industry were also proposed: opening up non-profit new organizations to receive charitable donations; introducing a refundable tax credit to support “original news content”; and providing subscription-based outlets with a temporary, non-refundable tax credit. An independent advisory board made up of members of the news industry will determine eligibility for the initiative, which will come into effect at the start of 2019. In the 2018 budget, the Liberals earmarked $50-million over five years for local journalism in “underserved communities.” The fall update shows a commitment of $595-million over six years. Costs for supporting firms, workers hurt by U.S. tariffs on steel and aluminum The federal government has collected $597-million in duties imposed as a countermeasure to U.S. tariffs on steel and aluminum since July 1. However, total costs for supporting businesses and works totaled more than $2.4-billion, with the Business Development Bank and Export Development Canada providing $1.7-billion in financing and insurance. Ottawa also announced an additional $250-million under the Strategic Innovation Fund. That’s on top of funding of the same amount announced in June for those hurt by the tariffs. Another $100-million under the fund will go towards the forestry sector. Other notes: Ottawa is also earmarking $62.6-million for the Nutrition North program, which has been heavily criticized for failing to reduce the cost of food and promoting healthier eating in the North. The funding will go to “several program changes” and to introduce what’s billed as a Harvesters Support Grant to lower costs of traditional hunting and harvesting activities. More details are likely to follow. The federal government will also extend the Mining Exploration Tax credit to 2024, which is expected to cost $365-million over that period. Ottawa will also launch an $11-million “centre for regulatory innovation, ” which will serve as a hub for businesses and regulators that support innovation. The Hill Times

Federal finances to go deeper into red; $14-billion in support for business in face of U.S. tax cuts, fall update shows

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Federal finances to go deeper into red; $14-billion in support for business in face of U.S. tax cuts, fall update shows

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