Canada Federal government should hike GST, abandon $100B stimulus plans as COVID-19 spending mounts: report

05:50  08 april  2021
05:50  08 april  2021 Source:   nationalpost.com

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OTTAWA — The Liberal government should abandon most of its $100-billion stimulus plans and increase GST as a way to recoup massive COVID-19 spending levels, according to a new report that says Canada is in need of a considerable fiscal reset.

Chrystia Freeland sitting at a table using a laptop: Deputy Prime Minister and Minister of Finance Chrystia Freeland speaks to news media before unveiling a fiscal update on Nov. 30, 2020. Freeland is scheduled to table the first budget in more than two years on April 19. © Provided by National Post Deputy Prime Minister and Minister of Finance Chrystia Freeland speaks to news media before unveiling a fiscal update on Nov. 30, 2020. Freeland is scheduled to table the first budget in more than two years on April 19.

The C.D. Howe Institute, a Toronto-based think tank, laid out a long list of recommendations on Wednesday for Ottawa’s upcoming budget, and warned about a “bleak outlook” for Canada should the government under Prime Minister Justin Trudeau neglect to correct course.

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Some federal lawmakers have expressed concerns about mounting municipal debt, but aggregate Despite federal aid, states were compelled to slash spending by 0 billion and hike taxes by $ 100 How will the COVID - 19 pandemic shape state and local budgets? The fiscal shock from the A few months later, with Democrats in control, Congress approved another massive stimulus bill, which

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Among the proposals are a two per cent hike in the federal Goods and Services Tax (GST), a reversal of the expansion of employment insurance, and a reduction in corporate tax rates, among other things. It also calls on Finance Minister Chrystia Freeland to abandon up to $100 billion in additional stimulus funds — promised in her fiscal update last year — as it is likely to add on to the debt burden while providing little economic benefit, according to the report.

“The 2020 Fall Economic Statement contained little to enhance Canada’s growth prospects and much to raise anxiety about mounting debt and exposure to adverse events, notably rising interest rates,” the report said.

The C.D. Howe recommendations come as Freeland prepares to table her first budget as finance minister April 19. Some economists and other observers have been pressuring Ottawa to back away from some of its more ambitious spending programs, saying the federal government is at risk of over prioritizing its social agenda while its fiscal outlook remains opaque.

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The federal government scrapped its main fiscal anchor — previously measured as total debt as a percentage of GDP — at the beginning of the pandemic. Freeland has yet to reinstate that measure, and has instead said spending levels would be dictated in part by employment numbers.

The C.D. Howe report, written by CEO William Robson, Alexandre Laurin and former Department of Finance official Don Drummond, calls for a reinstatement of the anchor as a way to clarify the government’s spending plans. It proposes a range of structural tax cuts and incentives that, the authors claim, could bring the budget into balance in five years.

Also in the report, the authors decry an “unprecedented accountability lapse” committed by the Liberal government when it declined to table a budget in the middle of the pandemic.

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The report proposes to mandate the tabling of a budget every year by Feb. 14, as it would keep governments from withholding critical information that play a vital role in the parliamentary system.

“Spending public money without authorization is an affront to democracy, and a budget is a unique and irreplaceable opportunity for members of Parliament to review the government’s revenue and expense plans,” they said.

Among the policies is a proposal to review and simplify the tax code, a change that business groups and economists have long said is the quickest way to boost economic productivity in Canada. Another would mandate that departments cut unneeded or outdated regulations to boost private sector productivity.

“The federal tax system contains hundreds of exemptions, deductions, rebates, deferrals and credits,” the report said. “While some attempt to recognize differing taxpayer capacities to pay, others are effectively disguised spending programs.”

Even if the recommendations proposed by the C.D. Howe Institute were enacted, Canada would “still be jeopardized by the prospect of other expensive initiatives recently floated by the federal government,” the report said.

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In particular, the government should refrain from hiking Old Age Security payments, introducing a national pharmacare program, or creating a universal basic income (UBI), as it would add to the federal debt levels, the report said. The economists suggest spending just two-thirds of the proposed $100 billion floated by Freeland.

The federal government’s debt-to-GDP ratio increased from around 30 per cent before the pandemic to 50 per cent, which economists warn leaves Ottawa with much less fiscal room should interest rates rise.

National and provincial debt could surpass a combined 94 per cent in the near future, the report warns, and is set to balloon to over 100 per cent by 2030 without significant retrenchment.

“This is a bleak outlook, and if concerns about repayment affect Canadian governments’ borrowing costs, it may not even be possible.”

Economists are in agreement that interest rates in the short and even medium term will remain near record lows, a trend that has already pushed federal borrowing costs below pre-pandemic rates despite an expected $381-billion deficit this year.

But the federal government needs to prove it is taking a longer-term view on the nation’s finances, the report said, primarily by proving it is capable of making hard decisions on spending cuts and laying out a clear path to return the budget to balance.

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The C.D. Howe as a result proposes a hike in GST from its current rate of five per cent up to seven per cent, reversing the previous Conservative government’s two per cent cut in 2006.

“Consumption taxes are the least distortive to economic growth and, considering Canada’s relatively low reliance on them among OECD countries, are a superior way to raise needed revenues,” the authors argue.

It also proposes hiking GST on transportation fuels like gasoline and diesel by 10 per cent, which would “give consumers a strong price signal to discourage CO2 emissions,” it says.

The group recommends cutting COVID-19 relief programs like the Canada Emergency Wage Subsidy (CEWS) and Canada Recovery Benefit (CRB), replacing them with a six-month bonus of $500 per month that targets low-income workers.

Federal corporate income taxes, the report said, should be lowered from 15 per cent to 13 per cent, mostly to make Canadian firms more competitive compared with the U.S., where former president Donald Trump slashed tax rates and introduced a tax write-off for private sector investments.

• Email: jsnyder@postmedia.com | Twitter: jesse_snyder

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