Connect with us
[the_ad id="89560"]

Business

Federal government’s ‘fudget budget’ relies on fanciful assumptions of productivity growth

Published

6 minute read

From the Fraser Institute

By Niels Veldhuis and Jake Fuss

Labour productivity isn’t growing, it’s declining. And stretching the analysis over the Trudeau government’s time in office (2015 to 2023, omitting 2020 due to COVID), labour productivity has declined by an average of 0.8 per cent. How can the Trudeau government, then, base the entirety of its budget plan on strong labour productivity growth?

As the federal budget swells to a staggering half a trillion dollars in annual spending—yes, you read that correctly, a whopping $538 billion this year or roughly $13,233 per Canadian—and stretches over 430 pages, it’s become a formidable task for the media to dissect and evaluate. While it’s easy to spot individual initiatives (e.g. the economically damaging capital gains tax increase) and offer commentary, the sheer scale and complexity of the budget make it hard to properly evaluate. Not surprisingly, most post-budget analysts missed a critically important assumption that underlies every number in the budget—the Liberals’ assumption of productivity growth.

Indeed, Canada is suffering a productivity growth crisis. “Canada has seen no productivity growth in recent years,” said Carolyn Rogers, senior deputy governor at the Bank of Canada, in a recent speech. “You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass.”

The media widely covered this stark warning, which should have served as a wake-up call, urging the Trudeau government to take immediate action. At the very least, this budget’s ability—or more accurately, inability—to increase productivity growth should have been a core focus of every budget analysis.

Of course, the word “productivity” puts most people, except die-hard economists, to sleep. Or worse, prompts the “You just want us to work harder?” questions. As Rogers noted though, “Increasing productivity means finding ways for people to create more value during the time they’re at work. This is a goal to aim for, not something to fear. When a company increases productivity, that means more revenue, which allows the company to pay higher wages to its workers.”

Clearly, labour productivity growth remains critical to our standard of living and, for governments, ultimately determines the economic growth levels on which they base their revenue assumptions. With $538 billion in spending planned for this year, the Trudeau government better hope it gets its forecasts right. Otherwise, the $39.8 billion deficit they expect this year could be significantly higher.

And here’s the rub. Buried deep in its 430-page budget is the Trudeau government’s assumption about labour productivity growth (page 385, to be exact). You see, the Liberals assume the economy will grow at an average of 1.8 per cent over the next five years (2024-2028) and predict that half that growth will come from the increase in the supply of labour (i.e. population growth) and half will come from labour productivity growth.

However, as the Bank of Canada has noted, labour productivity growth has been non-existent in Canada. The Bank uses data from Statistics Canada to highlight the country’s productivity, and as StatsCan puts it, “On average, over 2023, labour productivity of Canadian businesses fell 1.8 per cent, a third consecutive annual decline.”

In other words, labour productivity isn’t growing, it’s declining. And stretching the analysis over the Trudeau government’s time in office (2015 to 2023, omitting 2020 due to COVID), labour productivity has declined by an average of 0.8 per cent. How can the Trudeau government, then, base the entirety of its budget plan on strong labour productivity growth? It’s what we call a “fudget budget”—make up the numbers to make it work.

The Trudeau fudget budget notwithstanding, how can we increase productivity growth in Canada?

According to the Bank of Canada, “When you compare Canada’s recent productivity record with that of other countries, what really sticks out is how much we lag on investment in machinery, equipment and, importantly, intellectual property.”

Put simply, to increase productivity we need businesses to increase investment. From 2014 to 2022, Canada’s inflation-adjusted business investment per worker (excluding residential construction) declined 18.5 per cent from $20,264 to $16,515. This is a concerning trend considering the vital role investment plays in improving economic output and living standards for Canadians.

But the budget actually hurts—not helps—Canada’s investment climate. By increasing taxes on capital gains, the government will deter investment in the country and encourage a greater outflow of capital. Moreover, the budget forecasts deficits for at least five years, which increases the likelihood of future tax hikes and creates more uncertainty for entrepreneurs, investors and businesses. Such an unpredictable business environment will make it harder to attract investment to Canada.

This year’s federal budget rests on fanciful assumptions about productivity growth while actively deterring the very investment Canada needs to increase living standards for Canadians. That’s a far cry from what any reasonable person would call a successful strategy.

Business

Capital gains tax hike will cause widespread damage in Canadian economy

Published on

From the Fraser Institute

By Jake Fuss and Grady Munro

According to an analysis by economist Jack Mintz, 50 per cent of taxpayers who claim more than $250,000 of capital gains in a year earned less than $117,592 in normal annual income from 2011 to 2021. These include individuals with modest annual incomes who own businesses, second homes or stocks, and who may choose to sell those assets once or infrequently in their lifetimes (such as at retirement)

On Monday, two months after tabling the federal budget, Finance Minister Chrystia Freeland introduced a motion in Parliament to increase taxes on capital gains. On Tuesday, the motion passed as the NDP, Bloc Québécois and Green Party voted with the Liberals. Unfortunately for Canadians, the tax hike will likely hurt Canada’s economy. And the finance minister continues to make misleading claims to defend it.

Currently, investors who sell capital assets pay taxes on 50 per cent of the gain (based on their highest marginal tax rate). On June 25, thanks to Freeland’s motion, that share will increase to 66.7 per cent for capital gains above $250,000. (Critically, the gain includes inflationary and real increases in the value of the asset.)

According to Minister Freeland, the hike is necessary because it will bring in more than $19 billion of revenue over five years to pay for new spending on housing, national defence and other programs. This claim is disingenuous for two reasons.

First, investors do not pay capital gains taxes until they sell assets and realize gains. A higher capital gains tax rate gives them an incentive to hold onto their investments, perhaps anticipating that a future government may reduce the rate. Individuals and businesses may not sell their assets as quickly as the government anticipates so the tax hike ends up generating less revenue than expected.

Second, the government does not have a revenue problem. Annual federal revenue is increasing and has grown (nominally) more than $185 billion (or 66.2 per cent) from 2014-15 to 2023-24. Before tabling the budget in April, the government was already anticipating annual revenue to increase by more than $27 billion this year. But the government has chosen to spend every dime it takes in (and then some) instead of being disciplined.

Years of unrestrained spending and borrowing have led to a precarious fiscal situation in Ottawa. If the government wanted to pay for new programs, it could’ve reduced spending in other areas. But Minister Freeland largely chose not to do this and sought new revenue tools after realizing this year’s deficit was on track to surpass her fiscal targets. Clearly, raising taxes to generate revenue was unnecessary and could’ve been avoided with more disciplined spending.

Further misleading Canadians, the Trudeau government claims this tax hike will only increase taxes for “0.13 per cent of Canadians.” But in reality, many Canadians earning modest incomes will pay capital gains taxes.

According to an analysis by economist Jack Mintz, 50 per cent of taxpayers who claim more than $250,000 of capital gains in a year earned less than $117,592 in normal annual income from 2011 to 2021. These include individuals with modest annual incomes who own businesses, second homes or stocks, and who may choose to sell those assets once or infrequently in their lifetimes (such as at retirement). Contrary to the government’s claims, the capital gains tax hike will affect 4.74 million investors in Canadian companies (or 15.8 per cent of all tax filers).

In sum, many Canadians who you wouldn’t consider among “the wealthiest” will earn capital gains exceeding $250,000 following the sale of their assets, and be impacted by Freeland’s hike.

Finally, the capital gains tax hike will also inhibit economic growth during a time when Canadians are seeing a historic decline in living standards. Capital gains taxes discourage entrepreneurship and business investment. By raising capital gains taxes the Trudeau government is reducing the return that entrepreneurs and investors can expect from starting a business or investing in the Canadian economy. This means that potential entrepreneurs or investors are more likely to take their ideas and money elsewhere, and Canadians will continue to suffer the consequences of a stagnating economy.

If Minister Freeland and the Trudeau government want to pave a path to widespread prosperity for Canadians, they should reverse their tax hike on capital gains.

Continue Reading

Business

Internet bills should itemize Justin Trudeau’s new streaming tax

Published on

From the Canadian Taxpayers Federation

Author: Jay Goldberg

If streaming services want to fight back against the Trudeau government’s new streaming tax, which will cost them five per cent of their revenue each and every year, they need to be honest with customers and put the tax right on the bill so subscribers see it and understand how much it’s costing them.

The truth is this is a tax. It will cost Canadians money. And everyone knows it, including the prime minister. Maybe not the prime minister of 2024 but certainly the prime minister of 2018, when, in response to NDP pressure to tax streaming services, Justin Trudeau sensibly refused, saying: “The NDP is claiming that Netflix and other web giants are the ones who will pay these new taxes. The reality is that taxpayers will be the ones to pay those taxes.”

Well, that was then and this is now. Trudeau’s 2018 logic has been thrown out the window. The Canadian Radio-television and Telecommunications Commission announced last week it is “requiring online streaming services to contribute five per cent of their revenues to support the Canadian broadcasting system.” That means streaming services like Apple Music, Netflix, Spotify, YouTube and Disney+ will be hit with a new tax. And, as Trudeau pointed out in 2018, Canadians will be the ones paying the bill.

The government’s own analysis says the new measure will cost Canadians $200 million per year. When businesses are forced to hand over hundreds of millions of dollars to the government, they can’t just eat the cost. As Trudeau himself said, this streaming tax will be passed onto consumers. The industry agrees. Canadians should be “deeply concerned” with the government’s decision to “impose a discriminatory tax,” said Digital Media Association President and CEO Graham Davies, adding the move will only worsen the “affordability crisis.”

Translation: prepare for higher prices.

The streaming services targeted by these new measures shouldn’t take them lying down. They shouldn’t cooperate with the government’s plan to hide the new tax. Netflix, Spotify, Apple, Disney, YouTube and all the rest need to be honest with their customers about why prices are going up: the Liberals’ streaming tax.

Conservative Leader Pierre Poilievre recently wrote an op-ed in this paper telling corporations not to rely on lobbying behind the scenes to influence policy. If businesses want policies to change, they need to convince voters so voters will in turn convince politicians. Canadians have to understand why it’s going to cost them more to watch movies and listen to music. They are fed up with tax hikes. But only if they know what’s happening can they make politicians change course. That’s the right way to stop the streaming tax.

In case it’s not already obvious, simply sitting back and waiting for the next election isn’t good enough. “Obviously, my future government will do exactly the opposite of Trudeau on almost every issue,” wrote Poilievre in his NP op-ed. “But that does not mean that businesses will get their way. In fact, they will get nothing from me unless they convince the people first.”

That’s precisely why these streaming services, from Apple and Google to Spotify and YouTube, need to be honest with their customers about the streaming tax. They should add a separate item on every subscriber’s bill showing exactly how much Trudeau’s streaming tax is costing. They should direct angry calls to MP offices instead of customer service lines.

When everything feels unaffordable, a night in with a movie or a walk with a favourite album shouldn’t get hit with yet another tax hike.

Continue Reading

Trending

X