The Liberal government is spending the extra cash from a stronger economy on a wide range of areas – particularly scientific research and job programs for women – with a budget that also takes a new approach to its controversial tax plan for small businesses.
Finance Minister Bill Morneau’s third budget uses about $3.3-billion in new projected annual revenue that has resulted from stronger economic growth to fund the 2018 budget’s sprinkling of new spending aimed at various voting groups, particularly on the left.
As a result, the government’s fiscal track is largely unchanged from the fall. An $18.1-billion deficit is projected for 2018-19, with no timeline for returning to a surplus, as the Liberals promised during the 2015 election campaign.
The government titled its third budget “Equality + Growth,” but it does not include many of the measures economists and business leaders had recommended to help the Canadian economy. Specifically, it has no tax cuts or incentives – such as write-offs for business investment – that some wanted as a response to the major tax cuts approved this year in the United States, or measures to ease investor uncertainty over the fate of the North American free-trade agreement.
Mr. Morneau said his department will study the U.S. tax plan to see how Canada might respond. But he also pointed out that the tax cuts will lead to higher U.S. deficits.
“It’s not news to me that business is asking for lower tax rates,” Mr. Morneau told reporters. “I was in business. I would say that’s a pretty common refrain. What we need to do is to make sure we get it right. We want to make sure that we take a fiscally responsible approach. It’s interesting to me that the same people that are asking us to lower our taxes are the people that are telling me to stay fiscally responsible.”
He said Canada’s economy can be expanded through targeted federal investments in new technologies. The government plans to spend almost $4-billion over the next five years on science and research.
The budget promises to help women enter trades or get apprenticeships and to give an extra $10-million this year and $15-million next year to women’s organizations. And it says it will ensure that more women get academic funding, judicial appointments and financial help for starting businesses.
The budget backs off a controversial plan for a heavy tax on small companies’ passive investment income – money made by investing in shares, bonds or other sources unrelated to their main business.
The new plan will focus on limiting access to the lower small-business tax rate for private corporations with assets of more than $1-million.
Canadian-owned companies with annual income of up to $500,000 a year have a special, lower tax rate than larger companies do. As the government announced in the fall, the small-business rate will to drop to 9 per cent in 2019, down from 10.5 per cent in 2017 and 10 per cent this year. The rate for larger companies is 15 per cent. And both rates are significantly lower than what individuals pay.
Under the changes announced on Tuesday, small businesses will pay the lower small-business rate on as much as $50,000 a year of the passive investment income they generate. The rate will gradually climb on any income above that level, eventually reaching the maximum of 15 per cent on income above $150,000 a year.
Ottawa had earlier proposed heavily taxing passive investment income when business owners tried to withdraw it from their companies. Doctors, farmers and other small-business owners had complained they could face combined tax rates of as much as 70 per cent – well above the top tax rates for personal income. Small-business groups say the changes in the budget are better than the original plan, but will still take money out of the hands of entrepreneurs that they would otherwise reinvest in their companies or save for retirement.
Another key change in the budget concerns infrastructure spending. The government acknowledges that its ambitious plan to spend $180-billion over 10 years in this area is not rolling out as quickly as planned. Unspent money has been pushed ahead into future years, although Ottawa says this is largely owing to accounting issues rather than construction delays.
The budget also gives the green light for Via Rail Canada Inc. to buy new trains for its principal corridor in Quebec and Ontario. Further money is set aside to study Via’s proposed “high-frequency rail” plan, which would expand services in the Quebec City-to-Windsor corridor.
The budget’s appeal to women and the promise of a pharmacare study headed by former Ontario health minister Eric Hoskins appear to be aimed at center-left Canadians who might consider voting for the New Democratic Party. New Leader Jagmeet Singh is promising to make a national pharmacare program part of the NDPs platform for the next election.
The budget also appears designed to shore up Liberal support in Atlantic Canada and rural areas that depend on seasonal employment. The government promised to respond to complaints from seasonal workers about the employment-insurance system to help families in fish processing and tourism make ends meet until the new work season begins. It also pledged to spend more on small-craft harbours.
Regional development agencies will receive a total of $1.3-billion over five years, with more than $900-million going to vote-rich Ontario.
“I would consider this to be very much a left-of-centre budget because of the focus on equality,” said Craig Alexander, chief economist for the Conference Board of Canada. “If you look at the title of the budget, it’s equality and growth. But I would argue that it’s about equality in capital letters and growth in small letters.”
Conservative Leader Andrew Scheer said big-spending Liberal budgets are not producing results.
“Justin Trudeau is failing to balance the budget by 2019 as he promised, ensuring that future generations of Canadians will have more and more debt to pay back,” he said.
The NDP’s Mr. Singh called Tuesday’s budget a “timid” document that fails to act on pharmacare or close tax loopholes that favour the rich.
“On pharmacare, what the government is proposing is not a plan. It is a fantasy,” he said, noting that the Liberals’ promised study does not come with a funding pledge.
As expected, gender equality was a major theme of the 2018 federal budget. The budget includes new measures aimed at encouraging greater participation of women in the work force, along with a program to encourage more men to take paid parental leave.
BILL CURRY, ROBERT FIFE AND BARRIE MCKENNA
The Globe and Mail, February 27, 2018