In 2015, the Liberal Party swept into power by presenting big ideas and promising to do things differently: foundationally important things to Canada, like massive infrastructure investments in cities and towns across the country, a new approach to immigration, a clear path forward for commercializing lower-carbon-emitting sources of energy, a renewed competitiveness agenda for Canadian industry, the centrepiece tax cut for the middle class, and the party’s most important social policy initiative, the Canada Child Benefit. This last (and very expensive) promise was to be paid for by Canada’s highest-income households. The electorate responded and gave Justin Trudeau’s Liberals a majority.
But today the question is how to pay for these initiatives, and more. Even though corporate tax revenues are up (as of the end of March 2016), as are personal tax revenues (even with pesky unemployment), the money coming in doesn’t match the spending plans. Over the past three years, commodity prices and the resulting royalties paid to the government have been lower than expected. Combine the revenue shortfall with government program spending that’s up more than 5 percent, or $16 billion annually, and the ability of the government to move forward on important policy initiatives is severely limited. A perfect storm of sorts has developed for a government with bold ideas for the future of the country but insufficient funds in the bank.
Prime Minister Justin Trudeau and Finance Minister Bill Morneau appear to be serious about their policy commitments. If they are as serious about fixing Canada’s deficit in the long term, they should raise the GST. It is estimated that more than $7 billion could be raised annually by just a 1-percentage-point hike. Restoring the full 2-percentage-points cut by a previous government would bring $14 billion annually. Raising the GST would eliminate problems the Department of Finance is facing as the government prepares its next budget. No longer would officials have to check every nook and cranny for previously granted tax cuts to reverse or for schemes to stem “leakage” from the tax system.
With a GST increase, the rumour mill in Ottawa would long for some new material to spin: no one would be suggesting taxing workers’ employer-provided benefit plans or making dividend taxation treatment less favourable for investors. No pensioners would have to worry about getting tax bills for premiums paid on benefits under their hard-earned pension plans. The money from a GST hike would flow in reliably, like the Bay of Fundy tide. This increase could be targeted, purposeful and flexible: targeted, so as not to disadvantage certain low-income groups or regions; purposeful, to support policy goals of the government; and flexible to the point of being reversible if the fiscal situation improves or program spending priorities change.
It is a mug’s game for Department of Finance officials to play with the numbers from previous budgets’ program spending to find “new” money and seek new sources of taxation from people who can least afford it — especially when the solution is right in front of their noses. It would be wrong to increase income taxes on Canadians or slash and burn the programs promised in 2015.
However unpopular raising the GST may be, it is, over the long term, the path of least resistance to recovery for Canada’s finances. If Canadians are convinced the promised spending is important (infrastructure, the environment, new fighter jets, increased child benefits), then we have to accept that a consumption tax is a very efficient way of contributing to paying for it.
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Politically, raising the GST could be dangerous. According to a 2016 survey, more than 65 percent of Canadians oppose a GST hike — but 9 or so million Canadians are said to have benefited from the middle-class tax cut since then. Backlash from some voices will be loud — but probably not as deafening as if there were going to be a 5 percent tax increase on large and small businesses. Some will call for government spending freezes instead, and some will call for federal job cuts. Canada will be facing enormous pressures from the United States as the Trump administration seeks to lower corporate tax rates (bringing them more in line with Canada’s), but a simple rise in consumption taxes is not likely to jeopardize Canada’s competitiveness with our largest trading partner on the eve of a NAFTA reboot. As we saw in the first few days after the inauguration, the Trump administration will be working hard to attract business investment in America for America. Canada will have to be creative to retain the investments here of US-based manufacturing companies and attract new investment from around the world.
Canadians voted for a new approach, so we have to finance the new approach in a sustainable way. Infrastructure spending will be fuelling economic growth into the early 2020s — but not if we can’t get those projects rolling because of a ballooning deficit. Canada’s middle class needs protection, as do Canadian business interests within a changing North America. Having a federal government that follows through on its spending commitments and is nimble in the face of unprecedented global change and upheaval would not be a bad thing.
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