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Liberal government faces tough fiscal choices in implementing progressive agenda


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.

This new benefit will cost $22 billion per year, nearly paid for by folding in existing child tax benefits, including the recently enhanced Universal Child Care Benefit, and by eliminating income splitting for families with children.

One of the ironies of our social policy development is that the Harper government effectively set the stage for a large and progressive child tax benefit by greatly increasing spending on much less redistributive and well-targeted programs and tax measures.

The new government is also expected to quickly implement its so-called “middle class” tax cut, which will kick in above an individual income of $45,000 and deliver a maximum of $670 per year to individuals earning over $89,000. This measure, which will cost some $3 billion per year, will be paid for mainly through a higher tax rate on individuals earning more than $200,000.

Progressives who worry about growing income inequality will note two key features of the new government's tax plans. First, the plan is not quite as redistributive as it looks at first sight since it  leaves out below-average income workers. Second, the net effect is not to expand the federal income tax base.

True, the Liberal platform talks of examining some loopholes, such as the favourable taxation of stock options, but it rejected major revenue-raising measures – including higher corporate taxes or higher income taxes on anybody except the top 1%. This leaves little fiscal room to fund needed social programs such as child care or pharmacare.

The third major promise that will likely be quickly implemented is a quick boost to infrastructure investment of $5 billion in each of the next two years, falling to $3.5 billion in year three.

This will provide a welcome if modest boost to short-term growth and job creation, and well-chosen projects will boost business productivity and our future growth prospects. As shown by a Centre for Spatial Economics study commissioned by the Broadbent Institute, this kind of public investment program also increases current and future tax revenues and is appropriately financed from deficits.

The new government has said that it will run deficits of $9.9 billion next year, falling to $9.5 billion in year two, to $5.7 billion in year three and then returning to surplus. The planned deficits are significantly larger than needed to pay for the infrastructure investment program.

The key problem facing the new government is that its three major short-term promises – child benefits, income tax cuts and infrastructure investment  – effectively use up all of the fiscal resources it has at hand, including temporary deficits.

This shows up in the Liberal platform in the very modest amounts allocated to new spending on health care (which goes from just $400 million in year one to $1 billion in year four.) This is far from the amounts needed to offset the Harper government's pending cuts to transfers to the provinces, as the premiers will quickly point out when they meet with the new Prime Minister.

The Liberal platform also allocates very limited new funds to such “priorities” as educational and other programs for indigenous peoples, employment insurance reform, social housing programs, environmental programs, enhanced government regulatory capacity, and the list goes on. Short-term term deficits cannot sustain needed long-term public investments in all of these areas.

We can expect few surprises and some very welcome new policies from the Trudeau government in the next budget. But progressives will have to press hard for broader tax reform to expand the choices at hand.

Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.