Liberals bet big on economic growth to cover COVID-19’s costs

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This article was published 18/04/2021 (1250 days ago), so information in it may no longer be current.

OTTAWA—The Liberal government is betting big on economic growth to cover the significant costs of COVID-19 emergency spending and billions in federal stimulus spending.

Prime Minister Justin Trudeau was once pilloried for claiming the federal budget could “balance itself” if the Canadian economy grows at a good pace. But Deputy Prime Minister Chrystia Freeland’s historic COVID-19 budget, released Monday, codified that belief into the Liberals’ long-term plan.

The budget projects an eye-popping deficit of $354.2 billion for 2020-21, $154.7 billion in 2021-22, before declining to a more modest $30.7 billion in 2025-26.

But even with that unprecedented level of federal spending, the government predicts that increased economic growth will mean Canada’s debt-to-GDP measure will decline over the short- and medium-terms.

The Liberals are making good on their pledge to spend $101.4 billion in stimulus aimed at rebuilding the economy post-COVID, and the budget provides little in spending restraint for federal departments. Aside from a few new tax measures — a digital services tax, a luxury tax on expensive cars and personal airplanes, and cracking down on tax avoidance and evasion — the budget does little to boost federal revenues.

“I really believe that the greater danger today is not to invest in a strong recovery from the COVID recession and not to invest in stronger, more robust long-term growth for Canada,” Freeland told reporters at a press conference.

“We saw in 2009 that a prolonged economic recovery (after the Great Recession), a recovery where a lot of people don’t get back to work for a long time causes real pain and hardship and really hurts the economic potential of the country … The best way to pay our debts back is to invest in long-term growth.”

Freeland’s prepared budget speech read: “If COVID has taught us anything, it’s that we’re all in this together. Our country cannot prosper if we leave hundreds of thousands of Canadians behind.”

“The world has learned the lesson of 2009 — the cost of allowing economic hardship to fester. In some countries, democracy itself has been threatened by that mistake. We will not let that happen in Canada.”

Across more than 700 pages, the budget lays out how the Liberals intend to “build back better” after COVID-19’s economic devastation — and how the federal government plans to pay for it.

According to Department of Finance projections, the federal debt-to-GDP ratio — the “fiscal anchor” or benchmark that Ottawa tends to measure its fiscal plans against — will hit 51.2 per cent in 2021-22 before declining to 49.2 per cent in 2025-26.

The budget noted that “growth-enhancing investments can help improve fiscal sustainability” by spurring more economic growth than they cost. .

“These are important markers. They show that the spending proposed today is sustainable, and that the extraordinary spending we have undertaken to support Canadians through this crisis, and to stimulate a rapid recovery in jobs, is temporary and finite,” the budget document reads.

But a senior government official, who briefed reporters on the condition they not be named, made it clear that while the Liberals are committed to using debt-to-GDP as a guide, they won’t be constrained by the measure.

“Anchors are what they are. They’re a signal about commitment, they’re a signal about direction. Anchors are not and should not be straight jackets,” the government official said.

“Economies are dynamic. And governments need to be able to react in dynamic circumstances.”

Federal Conservative Leader Erin O’Toole accused the Liberals of having no real fiscal benchmarks.

“We feel this budget falls so incredibly short,” O’Toole told reporters.

“Canadians were expecting a pandemic budget. This is an election budget, and a poor one at that … Canadians are asking for an economic recovery plan that improves their financial security by creating jobs, increasing wages and lowering taxes.”

The Liberals are also banking on historically low interest rates to finance their spending.

While BMO chief economist Doug Porter said the government’s plan is credible, it is not entirely risk-free.

“The two biggest risk factors are getting the pandemic under control so the economy can fully open up again, and a big rise in interest rates in the medium term,” Porter said.

The government has attempted to mitigate the risk of higher interest rates by locking in some of its debt into longer term bonds, Porter said. While bonds with longer terms typically have a slightly higher rate, they might still be cheaper in the long run than a series of short-term bonds should interest rates rise.

“It’s like locking in a longer-term mortgage when rates are low. You’ll pay a bit more up front, but save a lot more later,” Porter said.

“We think it is doable. This was a healthy economy that was hit by a natural disaster. Once that disaster has been dealt with, the economy can bounce back.”

The most significant move Freeland made on the revenue side of the equation is the creation of a new Digital Services Tax applied to multinational internet giants like Facebook and Google. The three per cent levy would apply to companies with global revenue of at least $1.13 billion Canadian, and is expected to bring in $3.4 billion to federal coffers over five years.

The Liberals are also proposing a “luxury tax” on cars and personal aircraft worth more than $100,000, as well as boats worth more than $250,000. That is expected to collect $604 million over five years.

A one per cent annual tax will also be applied on the value of non-resident, non-Canadian owned residential real estate “considered to be vacant or underused” — a measure the government hopes will reduce the number of wealthy foreign buyers purchasing, but not using, Canadian homes.

The Liberals are also promising to crack down on tax avoidance and evasion, including “cross border tax schemes,” as well as providing more resources for the Canada Revenue Agency for enforcement initiatives.

With files from Josh Rubin

Alex Boutilier is an Ottawa-based reporter covering federal politics for the Star. Follow him on Twitter: @alexboutilier