Bill Morneau will have to deliver his 2017 budget without a clear idea of where the Trump administration is heading on tax and trade reform.
Canada’s Finance Minister held his first official meeting on Wednesday in Washington with his new U.S. counterpart, Treasury Secretary Steven Mnuchin, one day after President Donald Trump promised “massive tax relief” during a speech to Congress.
Mr. Morneau said he and Mr. Mnuchin talked generally about tax reform, the North American free-trade agreement and infrastructure spending during the meeting. He said he chose not to criticize plans circulating among congressional Republicans for some form of border adjustment tax on goods imported to the United States.
“When he spoke about tax reform, he did not go into the specifics of what those tax changes would be,” Mr. Morneau told reporters during a conference call after the meeting. “So at this stage, without details, it’s not a time for us to express support or opposition or even insights into the impact on the Canadian economy.”
Mr. Trump and the Republican-controlled Congress are both calling for major tax cuts for business and individuals, but there are sharp policy disagreements within the party over the best way to proceed. Some Republicans want a border adjustment tax that would impose new levies on imported goods, but critics warn it would penalize businesses that rely on imports and raise prices on a wide range of consumer items.
The C.D. Howe Institute has said a border adjustment tax would be “devastating” for Canada, although the effects on the Canadian economy of such an approach are still the subject of considerable debate in policy circles.
In a speech to Congress on Tuesday evening, Mr. Trump promised major tax reform, but did not indicate what shape that might take.
“My economic team is developing tax reform that will reduce the rate on our companies so they can compete and thrive anywhere and with anyone,” he said. “It will be a big, big cut. At the same time, we will provide massive tax relief for the middle class.”
The vague promises of deep tax cuts south of the border come as Mr. Morneau is preparing to release tax changes of his own. The Liberal Party’s 2015 election platform promised to raise $3-billion in revenue by eliminating tax credits that primarily benefit high-income Canadians.
In his 2016 budget, Mr. Morneau announced a formal review of these credits, or tax expenditures, and the results of that review will be released in the 2017 budget, expected later this month.
The review has led to widespread speculation about what Ottawa might do. The Liberals have ruled out changes to income splitting for seniors and have also said they would not alter the tax treatment of employer-sponsored health benefits.
During the conference call, Mr. Morneau was asked whether he would also explicitly rule out a hike in the tax treatment of capital gains. The minister’s response was that he would have more to say about the tax review when the budget is released.
“I’m not at this stage prepared to talk about what those measures might or might not be,” he said.
On Thursday, Statistics Canada will release its GDP figures for December, 2016, which will lead private-sector economists to update their growth forecasts for 2017 as a whole.
Mr. Morneau uses an average of such forecasts as the baseline for budget assumptions on government spending and revenue. He conducted a pre-budget survey of economists in early January, but will likely get an updated forecast from them before finalizing the 2017 budget.
Toronto Dominion Bank economist Brian DePratto said Finance Canada has not yet requested an updated forecast.
“It’s always best to have the latest and greatest [figures],” said Mr. DePratto, who noted the growth figures would be slightly better now than in January. “There’s no real incentive to try and stick with the outdated numbers.”
A February survey of private-sector economists conducted by FocusEconomics found a median forecast of 1.9 per cent growth in 2017 and 2 per cent in 2018. The forecast for 2017 has been constant over the past three months, but the outlook for 2018 has improved from the estimate of 1.8 per cent in a November survey.
Mr. Morneau said his budget will be based on the latest figures available.
“We are in regular communication with the economists that form part of our survey and we will ensure that we have a good understanding of their point of view,” he said. “That forms a basis for our planning and that will be consistent this year as it has been in the past.
OTTAWA — The Globe and Mail
Published Wednesday, Mar. 01, 2017 12:13PM EST
Last updated Wednesday, Mar. 01, 2017 7:24PM EST