Chrystia Freeland drops a bomb: A thrifty budget

“They don’t understand where the money is coming from. They don’t know how wealth is created,” former B.C. Premier Christy Clark said on the popular Curse of Politics podcast this week. “All they care about is Justin’s brand, holding on to power, and they say, ‘After me, the deluge.’ ”

Not that Trudeau probably winces at being compared to King Louis XV – he’s been called much worse in recent weeks.

But the critics are not only his enemies in the House of Commons.

C-suites complain that no one at the PMO listens to their pro-growth priorities. Old-school centrists yearn for balanced books and tight budgets. Almost seven in 10 voters support another party in a typical opinion poll.

The Liberals reinforced the stereotype in the 2021 election with pledges of C$78 billion in new spending over five years – a blow to the bottom line of a government that has run back-to-back deficits in the hundreds of billions.

They promised to distribute tens of billions of dollars in funding for child care spaces, pledged billions more for post-pandemic recovery, and promised to subsidize a universal pharmacare program that would pay for prescription drugs.

Then Freeland dropped its 2022 budget on Thursday. To the surprise of many analysts, the word of the day was restrained.

Conservatives still hated him. Pierre Poilievre, one of the party’s leading leadership candidates who is gathering large crowds with the promise of small government, accused the Liberals of “supercharging” inflation by racking up new spending. Jean Charest, a former Quebec premier who is also running to be Conservative leader, complained that there was no path to a balanced budget.

But are they preaching to the wrong choir? An Ipsos Reid poll recently revealed that only one in five Canadians cite deficit reduction as one of their top three priorities. Only 21% wanted to see a reduction in public spending. More than half wanted help with the cost of living.

Thursday’s budget reveals federal coffers have taken in C$36.1 billion more this year than the Department of Finance forecast last December when Freeland tabled a budget update.

A resurgence of an oil slick and a stronger-than-expected economic recovery have boosted revenues to the tune of C$22 billion in corporate income taxes this year alone. In six years, the federal government has revised its revenues upwards by 85.5 billion Canadian dollars.

So what will the Liberals who tax and spend all this extra money do? Not a lot.

They promised only C$2.2 billion in new spending this year, and an average of C$5.8 billion each year for the next five years.

In his budget speech, Freeland seemed to speak directly to anyone who doubted his commitment to responsible stewardship of the nation — outside his party and within.

“Our pandemic deficits are and must continue to be reduced. The extraordinary debts we have incurred to keep Canadians safe and solvent must be repaid,” she said. “It’s our fiscal anchor – a line we won’t cross, and one that will ensure that our finances will remain sustainable as long as they remain intact.”

Freeland has made restraint his personal mission. “Canada has a proud tradition of fiscal responsibility. It is my duty to maintain it – and I will.

There is precedent for his penny-pinking. The last time the Liberals were in government between 1993 and 2006, they eliminated the deficit after punitive cuts and “strategic program reviews”.

Freeland doesn’t plan to cut much, but she has promised a strategic policy review that will eventually target federal property, travel and increased digital service delivery. Treasury Board President Mona Fortier, the cabinet minister responsible for overseeing every penny the government spends, will rise to that challenge. The savings target is C$6 billion by 2027.

It was a signal to the centrists that their legacy is not toast.

Budget 2022 forecasts lower deficits than promised by Freeland in December – by 2027, that will amount to a total of C$50.4 billion in less red ink. The plan also maintains the line on direct program spending, which falls to 6.1% of GDP over the same period. This figure was 13.5% at the height of the pandemic.

This does not mean that the Liberals will not be expenses, however.

Thanks to an agreement that wins the support of the left-leaning New Democratic Party, the government is embarking on a five-year, C$5.3 billion national dental program. Over the same period, an additional C$10.2 billion will be invested in housing affordability. A long-promised national pharmacare program that could cost billions more could be the government’s boldest move in 2023.

POLITICO spoke with Nathaniel Erskine-Smith, an independent-leaning Toronto Liberal MP, before the budget dropped. He was a three-term Liberal who burst onto the scene when Trudeau took office in 2015.

He says the goal of government should be simple: do what it was elected to do.

“I don’t want to choose between global vaccine equity, climate action, reconciliation, affordable housing, the opioid crisis,” he said. “I think we can do all of these things in a financially sustainable way.”

Erskine-Smith hopes for “adult conversation” not about cuts, but about “creative revenue tools” that could pay for programs. Taxing the wealthiest Canadians was on his list.

In its budget, Freeland fulfilled a campaign promise to do just that. It has targeted banks and insurance companies that have done well in the pandemic with a one-time tax of 15% on income above C$1 billion.

It also increased the corporate tax rate for such corporations from 15% to 16.5% on income over C$100 million. These measures could bring in 6 billion Canadian dollars in five years.

Freeland says a crackdown on tax evasion will bring in an additional C$5 billion.

The Liberals will also crack down on a minimum tax rate of 15% for wealthy Canadians who “generally find ways to have much of their income taxed at lower rates.” They will give more details in the fall.

The finance minister walks a fine line that balances ambition and restraint. But as the Conservative Party fights for its soul in a murderous leadership race, Freeland and Trudeau appear to be assembling a coalition that plays against both the tax hawks and the doves within their party’s ranks.

Even the big business lobby offered tacit approval. “The direction is positive,” said Goldy Hyder, who heads the Business Council of Canada. “What we need now is a real partnership between government and the private sector to ensure the success and sustainability of these initiatives.

But with Covid returning to Ottawa and a ground war raging in Europe, the future is hard to predict. A senior government official, speaking to reporters on the merits, was candid. “The word ‘uncertainty’ is an important part of our thinking, the government’s thinking, in formulating this budget,” the official said.

The unnamed official was concerned about medium-term economic growth, pointing to recent OECD figures on longer-term growth potential per capita that placed Canada last among economies in the group.

“It’s a very big problem – and it has deep and complicated roots and no budget is going to solve it,” the official said.

The official said there were three global factors at play among all the other unknowns – China’s ambitions, widening protectionism and the fallout from the war in Ukraine. The speed and “simultaneity” of their emergence raise the most concerns, the official said.

Inflation is a persistent concern for Canadians, and the Bank of Canada is preparing to raise interest rates next week in an attempt to contain it.

Most economists agree that inflation is a global problem that no Canadian government can control alone. But macroeconomic theory isn’t very reassuring when gasoline costs more than CA$2 a liter at the pump and the average house price is north of CA$800,000.

The next financial update could present a darker and even more uncertain future that forces the government to make tougher choices about what it can afford and what it cannot. But at least this budget killed a stereotype.

The tax and expense tag that weighed on Trudeau and Freeland is, for now, a thing of the past.


Politico

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