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With the federal election campaign in full swing, Canada’s political parties are presenting their campaign promises on what they’ll do if elected.
While public finance isn’t a hot-button election issue, it’s nonetheless crucial to the country’s financial health.
To protect future generations, we must have a plan to balance the federal budget in a short horizon and reduce public debt. Tackling these issues is in everyone’s best interest. Passing on a heavy financial burden to our children would hinder their ability to make choices down the road. We’d be mortgaging their future and, in a sense, their well-being.
Establishing “two budgets” for a clear and predictable budget plan
Given the size of the pandemic debt, Raymond Chabot Grant Thornton believes the government should introduce special budgetary measures aimed specifically at reducing the deficit generated by pandemic-related assistance programs. These special measures should be presented separately from regular budgetary measures. The next federal government must present fiscal measures that are part of a clear and predictable budget plan. To this end, the firm believes that such measures—including some that may be bold, ambitious and in some cases offered on a temporary basis—should serve to give the economy a quick boost and to reduce the deficit and debt resulting from recent government aid programs.
This is why the firm believes new measures should be defined under two fiscal frameworks. More concretely, the next budget plan should be split into two parts that are considered separate “budgets.” An exceptional situation called for exceptional measures with equally exceptional budgets. The first fiscal framework would address the extraordinary deficit and pandemic-specific debt generated since March 2020 and the various measures that will generate the wealth necessary to reduce this deficit over time, while the second fiscal framework would address the regular service needs of taxpayers, including businesses, that would be typical in normal circumstances, as it was prior to the pandemic.
Even before the pandemic, when the conditions were right for generating surpluses—particularly with full employment—the government’s coffers posted a $14 billion deficit at March 31, 2019, and a $39.4 billion deficit at March 31, 2020.
Following historic annual deficits of $334.7 billion (projected at March 31, 2021) and $138.2 billion or greater the following fiscal year, the Office of the Parliamentary Budget Officer projects the deficit to reach $24.6 billion by March 2026. The total federal debt already stood at $721.4 billion for fiscal 2019–20. It’s expected to hit $1.19 trillion by the end of the current fiscal year and $1.32 trillion in March 2026. Considering the magnitude of these numbers, we must act quickly and get our fiscal house in order with a long-term plan. The devil is in the details!
Without a doubt, aggressive economic intervention was—and still is—necessary to help us get through the pandemic. The crisis would have been far more devastating if nothing had been done. Canada’s next government must continue to support the country’s economic recovery by providing assistance to the most vulnerable populations and to businesses in the industries hit hardest by the pandemic. Going forward, we need more sector-specific measures.
For example, the environment is a critical issue in this election. Environmental protection is important to people of all ages, as well as organizations and a wide range of actors. It’s even more important for the future of our planet and the well-being of upcoming generations. Public finance should be considered a similar priority, as it creates the financial means to implement concrete environmental protection measures.
Reducing the pandemic debt without raising taxes: a smart solution
Given the state of our public finances, we need to help businesses grow and broaden the tax base through job creation, particularly while we face a labour shortage. For the next generation, the solution to this problem is well-orchestrated immigration and integration.
Canadian taxpayers are already overtaxed. The federal government shouldn’t pursue this avenue as a means of bringing in more money. Quebec’s tax burden is already very high, ranking 1st in Canada and 11th out of 38 when included with OECD member countries. Therefore, tax increases would neither be desirable nor sustainable. This is particularly true for businesses that still need liquidities to recover, create jobs and increase productivity.
The next federal government should consider introducing temporary tax measures to accelerate the collection of capital gains tax, which would be collected later anyway. Raymond Chabot Grant Thornton recommended this and other measures in its 2021 federal prebudget proposal.
For a period of 24 months:
- Allow taxpayers to withdraw funds from their RRSPs at a combined federal and provincial tax rate of 15%, payable immediately, by establishing a structured mechanism to ensure the sound management of the retirement fund;
- Allow taxpayers to pay capital gains tax on assets (shares, revenue properties, etc.) also at a combined federal and provincial tax rate of 15%;
- Allow Canadian taxpayers to withdraw funds from their holding corporations and pay a combined federal and provincial tax rate of 20% on dividends;
- Allow corporations to increase their capital dividend account to 30% of expenses incurred on initiatives that benefit the health of their employees. This private-sector investment will lead to better lifestyle habits and lower healthcare spending in the future. Corporations could therefore pay their shareholders tax-free dividends amounting to 30% of these eligible expenses.
Increase the tax base by reopening the federal immigrant investor program
We also believe this is a good time to reopen immigrant investor programs, federally and in Quebec, as this would increase foreign investment in the country and contribute to our economic recovery. Canada stopped recruiting these newcomers in 2012 and officially ended its immigrant investor program in 2014. Now that economic recovery is a priority, a program of this nature would be particularly helpful as it would drive considerable economic benefits. It’s worth noting that between 2015 and 2020, the United States recruited more than 55,000 investors through their Immigrant Investor Program (EB-5). The program requires applicants to make a US$500,000 investment, which is then used to bolster the country’s economy. In Europe, foreign investors injected nearly €22 billion in the various jurisdictions between 2015 and 2019 through this type of immigration program.
Bold tax measures like these could be implemented quickly, as could the reactivation of the federal immigrant investor program. Intergenerational equity and the stability of public spending are at stake. There are ways for the federal and provincial governments to increase their revenues without increasing the tax burden on taxpayers. This would allow us to bring down the pandemic-related debt, balance the budget more quickly and reduce the burden on future generations.