Carney budget to focus on taxes, shift from Trudeau era

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“They’re trying to do what they can.”

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The big question for Carney and his finance minister, François-Philippe Champagne, is whether they take a big swing next week at cutting either personal or corporate income taxes after their first budget was seen as mostly tinkering.

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Champagne said week that the government’s first priority in making this budget is Canadians’ cost of living. But the second, he said, is economic growth, with the accent on helping small and medium-sized businesses seize opportunities.

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He has indicated in recent months that the government will continue to err on the side of what he calls “investments” in the economy, instead of reducing the deficit. Canada has the strongest fiscal position in the G7, Champagne has said many times, and that leaves room to spend or cut taxes or other revenue sources.

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“I think Canadians can understand that we have a strong fiscal position and we’re investing in the things that will generate growth to the country,” he said in July

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Champagne is expected to speak more about the government’s budget priorities on Monday during a speech in Ottawa.

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Many economists argue that corporate and personal income tax cuts, along with other tax reform measures, are the key to improving Canada’s productivity and standard of living. The problem is that they’re also expensive for a government that has already made big spending promises on such items as defence and cutting an array of taxes that helped fill its coffers.

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“Canada’s sluggish economic growth and federal fiscal excesses have become a vicious cycle,” said the C.D. Howe Institute think tank in a report released last week. “Canadians’ incomes are not growing nearly fast enough.”

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And to many economists, including Carney, tax reform is an important part of the solution.

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To date, the productivity mega-deduction, which the government estimates will cost the treasury $36.5-billion over the next five years, has been the biggest play. It was designed to use the tax system to spur investment, particularly in capital-intensive industries such as energy, mining, transportation, and technology and may well be included in the budget.

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Unveiled last month at an international investors’ summit in Toronto, the changes are expected to cut Canada’s projected tax rate on new investment, a key metric for large investors, by slightly more than half, to about 6.4 per cent from 13 per cent.

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The Carney government has also made a number of moves to trim or eliminate taxes: pausing the federal tax on gas and diesel, eliminating the federal portion of inter-provincial trade barriers, cancelling the digital services tax, making a modest cut to personal income taxes and the super mega-deduction.

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While economists say each of those moves should help the economy, they also add to the deficit.

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The challenge for Carney and Champagne is that cutting taxes of any type costs government revenue at a time when Ottawa is adding piles of red ink. There’s also concern that the government needs every penny it takes in during a trade war with the U.S., which consumes about three-quarters of all Canadian exports.

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But revenue has not been the federal government’s problem.

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As reported earlier this week in National Post, Ottawa may be on track to take in almost $20-billion more in taxes and other revenue this year than had been expected less than six months ago. The increase is largely a function of higher market prices for oil and other natural resources, increased revenue from personal income taxes and a modest jump in inflation.