Improved economy, tax changes set to give federal government a budgetary boost

OTTAWA — After months of battling controversies, Bill Morneau’s spring budget has the potential to blunt some criticism by showing that a return to balanced books could be within striking distance in just a few years.

However, it will likely be up to the finance minister himself whether his next spending blueprint includes a long-awaited federal timeline to eliminate the deficit.

Despite Canada’s more robust economy of late, the governing Liberals have long said they prefer to remain focused on lifting Canada’s long-term growth rather than rushing to balance the budget — even though they shattered their campaign promise to keep annual shortfalls below $10 billion.

The government’s latest forecast projected a $14.3-billion deficit for 2019-20. But experts say a lot has changed since that October prediction, which was based on private-sector projections taken in September.

Thanks in large part to the stronger-than-expected economy, forecasters are expecting Morneau’s budget — typically tabled in February or March — to show smaller deficits across the outlook than Ottawa had forecasted just a few months ago.

Economic momentum since September could shave deficits by about $4 billion in 2017-18, more than $1 billion in 2018-19 and by almost $4 billion in 2019-20, the Conference Board of Canada’s latest outlook predicts. It projects the 2019-20 shortfall to be just over $10 billion.

“They’re in a significantly better position than they were in the (fall) fiscal update,” said Matthew Stewart, the Conference Board’s director of economics.

Scotiabank’s latest forecast says the improved economy will lower the combined deficits this year and next by almost $10 billion.

None of the recent projections, however, take into account another fiscal boost to be laid out and factored in to the next federal budget: the windfall from a controversial new tax change that limits on the use of passive investment income by the top three per cent of the wealthiest incorporated individuals.

The passive-income change, once fully implemented, is expected to bring in a significant amount of revenue.

Last fall, the parliamentary budget officer estimated the measure would generate about $1 billion for the government in each of the first two years before gradually expanding to up to $4 billion after five years and as much as $6 billion after 20 years.

Randall Bartlett, the chief economist for the University of Ottawa’s Institute of Fiscal Studies and Democracy, said his estimate after five years is also close to $4 billion.

The government, however, insists the tax change wasn’t a revenue-generating exercise.

“It was about ensuring that wealthy individuals did not have an incentive to incorporate, just so they can get a better tax rate than the middle class,” Morneau spokeswoman Chloe Luciani-Girouard wrote in an email.

The Conservatives have been highly critical of the government’s tax changes, fiscal approach and broken campaign promises — and they’re sure to resume their attacks later this month when MPs return to the House of Commons.

“First, he said he would run modest deficits. Now we know that his out of control spending is costing taxpayers over $100 billion,” Conservative Leader Andrew Scheer said during question period on Dec. 13, the last sitting day before the holidays.

“Second, he said he would balance the budget in 2019. Now his government is telling us it does not even know when the budget will be balanced.”

Prime Minister Justin Trudeau responded by saying the Tories chased “their goal of balancing the budget at all costs,” while arguing the Liberal approach would grow the economy and “put more money in the pockets of Canadians who need it.”

Morneau himself — beset for months by controversy over his contentious tax-reform plan, ethical questions over his personal assets while in office and conflict-of-interest allegations — is desperate for political wins in 2018. Setting a timeline towards balanced books could be an option.

There’s ongoing debate about governments running deficits when the economy has been red hot. Some experts say modest shortfalls are of little concern as long as they include investments to help the economy; others disagree.

Stewart recommends staying closer to balanced books in good economic times to enable the government to ramp up deficits as economic stimulus in tougher times, if required.

Not all economists believe Ottawa’s books are on the right track, even after the economy’s powerful 2017 performance.

A recent study by Bartlett’s institute predicted that the expected slowdown in growth, combined with unrealistic government expectations for revenues, expenses and public debt charges, would lead to rising deficits starting this year. He predicted the shortfall would approach $22 billion by 2019-20.

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