During the Great Tax Debate of 2017, fans of realpolitik showed their disregard for wonks by assigning them to the fictional “Economist Party.”
The wonks—academic economists, mostly—invited ridicule because they had the audacity to demand proof when apoplectic entrepreneurs declared that Finance Minister Bill Morneau was bent on destroying capitalism.
Disclosure: if it came down to a choice between, say, Lindsay Tedds, a tax expert at the University of Victoria who is active on social media, or Arlene Dickinson, the Dragons’ Den star who implied the only thing keeping entrepreneurs in Canada was the ability to sprinkle profits among family members, I’m on Team Tedds all the way. But all that is over now. The Economist Party lost. Prime Minister Justin Trudeau and Morneau capitulated, hacking their tax-reform plan to its least controversial core, and adding a promise to drop the small-business tax rate to nine per cent from the current 11 per cent by January 2019.
The sops kept coming on Tuesday, as Morneau used the annual autumn update of the federal government’s fiscal situation to change the channel from French Villas and Numbered Companies to Good Times Brought to You by the Enlightened Liberal Party of Canada. “In just two years, the government’s investments have helped to increase consumer confidence and brought hope for the future for millions of Canadian families,” the Trudeau government said through the 2017 fall economic statement, also titled Progress for the Middle Class.
I ignored Morneau’s speech to the House of Commons, as I’ve tired of the Trudeau PMO’s insistence that every voter be addressed as if he or she is 13 years old. Instead, I stuck to the update, wondering what the calm and rational Economist Party might say about the finance minister’s work to date.
The star of the 2017 update was the Canada Child Benefit (CCB), the federal payment to middle-income households that appears to have played a part in jolting the economy out of the slump that followed the collapse of oil prices in 2014 and 2015. The document includes a graph that shows consumer confidence and household consumption going straight up following the introduction of the CCB in July 2016. Even Bank of Canada Governor Stephen Poloz is a fan. The CCB “was pretty significant, for that first year,” he told me and a few others in Washington, D.C. on Oct. 14. “What it did was, it put a floor under some folks and it gave them, in some cases, the extra ability for the second spouse to go to work. It may have meant being able to afford second transportation or childcare, or both of those things. It could be one of the reasons we’ve had a bump up in the labour participation rate, which is positive.”
Morneau knows a winner when he sees it. He said the government would ensure the gains from the CCB aren’t eroded by inflation, promising to accelerate a plan to index the benefits by two years. Much of the rest of the document was taken up by a restating of the new tax proposals announced last week. The only other significant policy announcement was a pledge to expand by $500 million annually a tax benefit for poorer Canadians with jobs.
The latter is a good idea. Income supplements are excellent ways to encourage people to work rather than settle for welfare payments. The potential of Canada’s economy will be constrained as an aging population shrinks the pool of available labour. That means governments will need to think harder about encouraging previously marginalized talent to take jobs. The CCB also may help, although most studies suggest the best way to do that is to subsidize daycare directly.
Morneau might have been tempted to spend more.
Canada’s economy has grown significantly more this year than anyone imagined it would. That means unexpected revenue. The Finance Department now predicts the budget deficit will be about $20 billion in the fiscal year ending in March 2018, compared with a projection of $28.5 billion at the start of this year. The deficit is on track to be about $15 billion narrower over the following two fiscal years.
The windfall will bring calls for Morneau to balance the budget. He appears to have no interest in doing that. The deficit will be $12.5 billion in 2023, which is the outer limit of Finance’s forecast. “The government’s plan includes a responsible approach to fiscal management that is appropriate for the current economic cycle and focused on long-term economic growth and fiscal sustainability,” the update states. “This approach has been effective, and the economy is outperforming expectations.”
The Economist Party will split on this question. Keynesian economics got a bad name because politicians ignored John Maynard Keynes’s counsel that periods of strong economic growth be used to pay off debt. As a result, a generation of economists doubt governments can be trusted to keep their spending in check during times of plenty. That’s why you may have heard voices on Bay Street begging the Trudeau government to put a timeline on when it will eliminate the budget shortfall. Others think the government should introduce a law obliging it to do so over a reasonably short period of time.
Morneau is going to try something different.
A better measure of a country’s fiscal health is the ratio of debt to the size of the economy. Canada’s debt-to-GDP ratio is a mere 31 per cent; it is projected to decline to about 29 percent over the next five years.
That’s pretty much what Morneau said would happen in 2016 when he plunged the federal government into deficit for the first time in a couple of decades. (Stephen Harper’s deficits were forced by the Great Recession.) He said government spending would make up for absent business investment, sparking economic growth, which would generate enough revenue to keep federal debt from getting out of hand. Morneau says he will be guided by the debt, not the deficit. His update commits to keep the debt-to-GDP ratio on a downward trajectory.
A public promise from the finance minister should be enough to anchor expectations. In Morneau’s case, it might not be. It will take time for him to restore the credibility he lost for opting against selling his stake in the family business, which operates in areas subject to Finance policy and regulation. That’s too bad, because otherwise he’d have an excellent story to tell.
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