Prime Minister Justin Trudeau’s government is poised to reveal an ambitious budget aimed at tackling housing affordability and supporting young Canadians. However, the looming question on many minds is whether this endeavor will necessitate tax increases.
Already, the government has committed over $46 billion, with a significant portion allocated to initiatives such as bolstering housing supply, advancing artificial intelligence development, and fortifying defense spending. Yet, amidst mounting debt costs, Finance Minister Chrystia Freeland has vowed to maintain control over deficits in the budget slated for release on Tuesday.
Robert Asselin, a former Trudeau adviser now associated with the Business Council of Canada, expressed concerns about the government's spending habits, suggesting that tax hikes and deferring previously earmarked expenditures might be inevitable strategies to counter escalating debt service costs.
While economists anticipate ongoing deficits, they don't foresee significant exacerbations. Freeland has outlined plans to cap shortfalls at around $40 billion for the current fiscal year and the subsequent two, aiming to restrict deficits to approximately one percent of nominal gross domestic product from 2026-2027 onward.
Debt charges have surged by 36 percent compared to the previous fiscal year, totaling $39.2 billion from April 2023 to January. Projections indicate they will consume over 10 percent of revenue in the coming years, constraining potential spending endeavors.
Trudeau and Freeland have pledged not to increase taxes on the middle class but have left room for imposing new taxes or adjusting existing levies on affluent individuals and corporations. This echoes their approach in 2022 when a one-time 15 percent windfall tax was imposed on banks' earnings exceeding $1 billion.
Corporate taxes have already become a significant revenue source, comprising 21 percent of total revenues in the fiscal year 2022-2023, marking the highest proportion on record since the late 1960s.
While an upswing in revenues fueled by a stronger-than-expected economy may alleviate some pressure, the government is likely to spread out new expenditures over several years, a tactic observed with recent announcements.
Trudeau's administration is aiming for lower interest rates in anticipation of the 2025 election, seeking to address affordability concerns that have contributed to a decline in popularity. Despite assurances from Freeland that the fiscal plan won't contribute to inflationary pressures, several provinces have deepened their deficits this year.
Rebekah Young, an economist at the Bank of Nova Scotia, anticipates modest near-term demand measures in the budget but warns of the cumulative impact of government spending across all levels, which could complicate the Bank of Canada's efforts to manage economic dynamics.
Trudeau initially assumed office in 2015 with promises of modest deficits to fund public infrastructure investments. However, deficits persisted, reaching record highs during the COVID-19 pandemic. Despite economic recovery, spending remained elevated, prompting concerns about the debt-to-GDP ratio in the face of potential economic shocks.
Rachel Battaglia, an economist at the Royal Bank of Canada, emphasizes the importance of fiscal discipline to maintain government credibility and avoid increased borrowing costs, which could adversely affect bond investors, businesses, and households alike.
While Canada's federal government debt maintains a AAA rating from most agencies, Battaglia warns of a higher risk of downgrade compared to other top-rated peers, potentially leading to elevated funding costs with repercussions for various sectors of the economy.
