Finance Canada Report Raises Eyebrows

Two important economic reports were released in Canada on October 19 and October 23. The former, by the Finance Department has raised eyebrows for its tax and spending increases. The second, from the Office of the Parliamentary Budget Officer, has warned about the effect of negative trade actions on Canada’s GDP.

Let’s start with the PBO’s assumptions and projections for the period 2018 to 2020:

  • Investment Climate: The U.S. Tax Cuts and Jobs Act will not have a material impact on Canada’s investment climate;
  • Interest Rate Hikes: The Bank of Canada will steadily increase its policy interest rate through early 2020.
  • Household Financial Health: as a result of interest rate hikes, households’ financial vulnerability is expected to increase as their debt-servicing capacity is further stretched.
  • Economic Growth, or Lack Thereof: real GDP in Canada is expected to advance by 2.1 per cent in 2018 and 1.8 per cent in 2019 before slowing to growth of 1.5 per cent annually, on average, over 2020 to 2023.
  • Medium Term Growth: the PBO expects that the Canadian economy to rely less on consumer spending and the housing sector (a significant contraction in residential investment and a deceleration in house prices through 2020 is projected). Rather, business investment and exports are expected to make a greater contribution to economic growth.

Finance Canada’s annual financial report, meanwhile, has raised eyebrows, particularly when it comes to debt, taxes and growth. One significant revelation from the annual financial report: the budgetary deficit is $19.0 billion against revenue increases of $20.1 billion.

The Finance Department pointed to the International Monetary Fund (IMF) report that Canada’s total government net debt-to-GDP ratio, which includes the net debt of all levels of government and the assets held in the CPP/QPP funds, is standing at 27.8 percent. This is the lowest level among G7 countries in 2017. Real GDP growth was 3.0 percent and nominal GDP grew 5.4 percent, indicating good growth results. But, as reported by the PBO, this growth rate is expected to wain significantly.

Dr. Jack Mintz, who will be speaking on the subject of economic growth and competitiveness at the Distinguished Advisor Conference, November 12 in Quebec City, gave us his thoughts on the effect of taxes on productivity and economic growth:

“With an aging population, governments will need resources to fund health, long-term care and pensions. Growth is critical since retired populations will depend on the taxes paid by workers and businesses in the future. Labour growth in Canada has fallen from 2 to 1 percent in recent years, even though migration accounts now for 70 percent of population growth. So if one wants to achieve higher growth, it will depend on productivity growth — output per worker. Governments boost productivity growth through spending on infrastructure, education and research, but less so on transfers and consumption-based programs like health. Governments can harm productivity through taxation, especially with reliance on income taxes and land transfer taxes.”

Certainly Canada is relying heavily on its income tax revenues. According to the report, federal revenues totalled $313.6 billion in 2017-18, up $20.1 billion, or 6.9 percent, from 2016-17. Indeed, the largest source of federal revenues is personal income tax, accounting for 49.0 percent. This is followed by corporate income tax revenues at 15.2 percent and GST revenues at 11.7 percent; EI premiums contributed 6.7 percent of total revenue. All of which means that people and businesses contributed close to 77 percent of all revenues to government. Other sources included other taxes and duties, non-resident taxes and income from government business activities.

Also, due to a change in the way that unfunded pension obligations are accounted for, the projected budgetary balance has been restated to $19.9 billion, and the federal debt has been restated to 32.0 percent of GDP, up from 31.0 percent.

This annual federal finance report does provide a glimpse into the future for investors and taxpayers. Simply stated, deficits happen when government spending exceeds revenues and that, in turn, increases debt.  What we are left with is a circular problem: debt increases, deficits increase, and interest costs increase, all because of higher debt. This cuts into the benefits that can be delivered to people. Worse, rising debt and deficits decrease future standards of living of our heirs, too.

at Canada’s total government net debt-to-GDP ratio, which includes the net debt of all levels of government and the assets held in the CPP/QPP funds, is standing at 27.8 percent, the lowest level among G7 countries in 2017. Real GDP growth was 3.0 percent and nominal GDP grew 5.4 percent, indicating good growth results.

Looking forward, however, things don’t appear as rosy. Because of a change in the way that unfunded pension obligations are accounted for, the projected budgetary balance has been restated to $19.9 billion, and the federal debt has been restated to 32.0 percent of GDP, up from 31.0 percent.

This annual federal finance report does provide a glimpse into the future for investors and taxpayers. Simply stated, deficits happen when government spending exceeds revenues and that, in turn, increases debt, which creates a circular problem: when debt increases, deficits increase, because interest costs rise to service a bigger debt. The problem with rising interest costs is that they cut into the benefits that can be delivered to people; worse, rising debt and deficits decrease future standards of living.

 

 


Posted under: Income Tax

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