Low oil prices have taken their toll on an already weak Canadian economy, where household debt levels are at record highs and business investment continues to lag. The Bank of Canada held off on a further rate cut this week, opting instead to wait and see the size and structure of fiscal stimulus in the upcoming federal budget.
With a plunging Canadian dollar, collapsing oil prices, slumping stock markets and signs that the economy stalled in the last quarter of 2015, it is easy to think that we are on the cusp of economic disaster. But the state of the Canadian economy, while indeed dismal, does not justify alarmist pronouncements that threaten to make things even worse by undermining consumer and business confidence.
The recent federal election featured something of a debate on fiscal policy, with the Liberals promising to run modest deficits for three years in order to stimulate a sagging economy and finance needed long-term investments in infrastructure and social programs. This approach won wide support among both progressives and mainstream economists.
Seven years after the great financial crisis of 2008, the world economy remains at high risk of a new slump despite continued ultra low interest rates. The IMF has called on the United States to put any interest rate increase on hold so as not to worsen the still extremely weak economic situation in Europe and developing countries, notably China.
The so-called “middle class” tax cut promised by the newly elected Liberal government in the name of promoting greater fairness seems set to be quickly implemented for the 2016 tax year. Yet the distributional and revenue consequences of this measure are often misunderstood, and the proposed change merits reconsideration.
Currently there are four federal tax brackets: 15% on taxable incomes of less than $44,701; 22% on further income up to $89,401; 26% on further income up to $138,586; and 29% on income above that amount.
Canada’s right-wing have fiercely denounced the Alberta NDP government’s first budget for its failure to deeply cut spending on social programs and public services so as to balance the books. The Fraser Institute has even gone so far as to claim, absurdly, that the large Alberta deficit of $6.1 billion this year is due to years of so-called over spending rather than because of the recent collapse of oil prices.
The briefing books being prepared for Prime Minister-designate Trudeau and his new Cabinet are likely warning of tough fiscal choices ahead. It will be very hard for the incoming government to reconcile a genuinely progressive platform on the social spending side with limited revenues, even given an acceptance of short-term deficits.
We can expect quick implementation of the new Canada Child Benefit, which will deliver higher benefits to all but the most affluent families with children and will significantly reduce inequality and poverty by being income-tested. This is the approach that has long been called for by Campaign 2000 and the Caledon Institute, building on the child benefit reforms of the Chretien government.
In the October 2013 Speech for the Throne, the Canadian government announced it would introduce balanced-budget legislation. At the time this vague proposal attracted little interest from anyone, although a year later the Parliamentary Budget Office (PBO) did produce a substantial document analyzing the benefits and costs of such a proposal.
The recent election was full of varying promises to increase growth rates and employment levels. Few of these promises, however, addressed a critical weakness in our ability to compete in global markets: significant literacy and numeracy skill shortages.
This is a critical area where the federal government has a vital role to play.