Finance Minister Chrystia Freeland’s first post-pandemic budget had four big tasks.
First, he had to get the country’s finances back on track, return the deficit and debt to their pre-pandemic path, and put fiscal and monetary policy on the same anti-inflation page.
Second, he had to deal with Canada’s housing crisis.
Third, it had to address the long-term challenge of Canada’s low productivity growth.
And fourth, it had to fund promised new programs, from pharmaceutical care to child care to a big boost in military spending, while respecting the first item on the agenda.
So how did Budget 2022 fare?
Ms. Freeland gets a passing grade, just barely, on Item 1. She gets bouquets and celebrations on Item 2. Item 3 gets a question mark. Item 4 also receives a question mark, or perhaps a reduced grade for incomplete work.
The good news is that, as Ms. Freeland said, the economy is booming. Canada has recovered 112 per cent of the jobs lost during the pandemic, and unemployment is down from what it was at the start of 2020.
It shows that a large dose of fiscal stimulus, a lot of government borrowing, was what was needed to beat the pandemic recession. He also proves that the opposite is now required.
After a deficit of $314 billion in 2020-21 and an expected deficit of $114 billion in the fiscal year just ended, Ottawa projects a deficit of $52.8 billion this year. One part of that is actuarial adjustments that fluctuate with interest rates; Based on cash inflows and outflows, Ms. Freeland projects a deficit this year of $43.9 billion. That drops to $33.8 billion next year and $10.2 billion four years from now.
It would have been better to put fiscal and monetary policy on the same anti-inflation page, through a smaller deficit. That could happen through any combination of spending cuts or tax increases; what is inflationary is not the level of public spending per se, but the economic stimulus that comes from bringing future spending into the present, through deficits.
That said, today’s deficit is modest enough that the debt/GDP ratio is back on a downward slope. And Mrs. Freeland has mostly avoided the fallacy of trying to fight inflation by handing out free money. Many of her provincial counterparts, on the other hand, have been unable to contain themselves. Alberta is temporarily eliminating its gas tax; Ontario is refunding vehicle license fees; British Columbia is cutting public auto insurance rates; Quebec is sending $500 checks to just about everyone, just because.
Still, his government couldn’t resist the temptation to dole out money in the one place where it’s most likely to fuel inflation: the home.
The budget does include new measures to stimulate the construction of more and denser housing. But Ms. Freeland is also doubling the first-time homebuyer tax credit, to $1,500, and creating a new tax haven called the Tax-Free First Home Savings Account. These will use taxpayer dollars to increase housing inflation. The only saving grace is that these programs aren’t that big: just $1.4 billion over five years.
As for his plans to increase productivity, we don’t want to be ungenerous, but they resemble the subsidizing-a-group recipes that have been tried before, with mixed results.
The budget also promises to find an additional $16.1 billion in tax revenue, over five years, under the rubric of “A Fair Tax System.” More than $6 billion will come from levies on banks and insurers, luridly classified as “Financial Institutions Required to Help Pay for Recovery.” Close to $8 billion will come from closing the loopholes, in particular preventing the use of foreign corporations to dodge taxes.
And finally, there are the new programs the Liberals have promised, including those that are part of their deal with the New Democrats. The cost of national child care is fully accounted for and there is $5.3 billion for a national dental care program for low-income people. But a couple of other important items are AWOL.
National defense gets a budget increase, but it’s relatively modest. Five years from now, Canada will still be nowhere near NATO’s goal of spending 2 percent of GDP on defense.
And then there is the pharmacy. Or rather: Where is pharmacare? Ms. Freeland’s explanation is that Thursday’s budget is just the first chapter of her administration’s four-year term. Pharmacare is for next year’s budget. Or maybe the following year.
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