Federal Finance Minister Chrystia Freeland has taken to touting what she calls her government’s balanced fiscal approach, arguing that the Liberals are combining spending restraint and cost-of-living assistance to poorer households.
“We’re being very careful that the measures we put in place are targeted and fiscally responsible,” she told reporters in Windsor, Ont. last week.
That claim of fiscal responsibility will be decisively tested in the next six weeks or so, when Ms. Freeland delivers her economic and fiscal update. It’s possible the Liberals will hold the line on new spending, even as inflation inflates revenues.
It’s possible, but it would be a first. Since Ms. Freeland delivered her first fiscal update, nearly two years ago, the Liberals have taken each increase in revenues as an opportunity to spend.
If Ms. Freeland had stuck to the spending projections she made in her 2020 update, she would likely have already eliminated the federal deficit, easing inflationary pressures and reducing the need for the Bank of Canada to hike interest rates.
Two years ago, the federal government estimated its program spending would hit $373.9-billion in fiscal 2023. By April of this year, that projected program spending had jumped to $425.4-billion, an increase of $51.5-billion, or 14 per cent.
It’s important to note that the 2020 estimates already included the vast majority of pandemic emergency assistance. In addition, those figures excluded debt servicing costs and actuarial adjustments. So the pandemic and the effect of rising interest rates aren’t the reasons for the higher spending.
Policy decisions by the Liberals are. And the most critical decision was the choice to spend virtually all of the new money flowing in to the federal treasury. The 2022 budget forecast revenue increases of $312.4-billion for fiscal 2021 through to fiscal 2026, above and beyond the increases already predicted in the 2020 fiscal update.
Those extra funds could have been allocated to tax cuts, to reducing the deficit or to increased spending. The Liberals opted for that third choice, in a lopsided way. Projected program spending over that six-year period has risen by $231.8-billion more than forecast in 2020. Put another way, the Liberals are choosing to spend 74 cents of every unexpected dollar in revenue.
An obvious test of the Liberals’ devotion to fiscal restraint will be what happens to that ratio. Will the Liberals again choose to spend the majority of any revenue upside? Or will they instead opt to push down the deficit aggressively?
We’ll find out in the next month or so whether Ms. Freeland’s self-professed devotion to fiscal restraint in recent months is genuine, or posturing.
Taxing questions
Responding to a recent Tax and Spend about the effect of public-sector hiring on tight labour markets, one reader noted that collective bargaining agreements hinder the ability of the federal government to trim its workforce. Ottawa has to rely on attrition, the reader contended.
That’s not quite correct. There are layoff and severance provisions, for instance, in public servants’ collective agreement with the Canada Revenue Agency. But, fair to say, the Liberal government has not shown any inclination toward issuing pink slips to the bureaucracy.
Even relying solely on attrition would give the federal government ample scope to trim its ranks. The most recent report on the public service says 16,528 new employees were added to the core public service in fiscal 2021 as “indeterminate hires,” meaning that they were not term, casual or student workers.
Without those new hires, the core public service would have expanded by less than 1 per cent between fiscal 2020 and fiscal 2021, with the net increase reflecting the hiring of term and casual workers. So, even with just a hiring freeze limited to permanent positions, the federal government could have flatlined the growth of the civil service.
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Shortfall predicted on Big Tech tax: Ottawa’s plan to levy a digital services tax on the revenues of tech giants that do business in Canada but are headquartered elsewhere will raise less money than predicted, the Montreal Economic Institute says in a new report. And any such tax will end up costing consumers, the institute concludes.
The federal Liberals have proposed draft legislation for a DST to take effect on Jan. 1, 2024 (it would be retroactive to Jan. 1, 2022). But so far no bill has been tabled in the Commons.
France’s experience with a DST, which fell well short of initial forecasts, suggests Ottawa’s revenue will similarly be lower than expected, the MEI says. More problematic, though, is the likely impact on consumers. The MEI writes that Apple and Amazon increased their prices for French customers by 3 per cent – equal to the DST rate – and Google increased prices by 2 per cent. That means it’s probable that customers, not the bottom lines of tech firms, will feel the pinch of a Canadian version of the DST, the institute says.
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