Canada’s Liberal government may have to abandon its plan not to raise taxes this year.
Last week’s announcement that the fiscal year 2021 budget deficit will hit C$343.2 billion ($252.4 billion) sent shock waves. Finance Minister Bill Morneau hasn’t said yet said how the government will deal with a budget shortfall that’s up tenfold from the previous fiscal year.
The government has previously said its strong economy before the pandemic would help it move through the downturn. “We’re not worried about having to raise massive amounts of money from taxes,” Prime Minister Justin Trudeau said June 25.
But as other countries consider levying new taxes on wealth, carbon, and digital services to fill the revenue void left by global shutdowns, some observers say Trudeau’s government may have to make similar moves.
Reining in spending has fewer economic costs than raising revenues, but the current Liberal government came to power espousing the contrary and isn’t likely to take to austerity easily, said Alex Laurin, director of research at the C.D. Howe Institute, a right-leaning think tank in Toronto.
The government’s room to maneuver will be constrained by its position in Parliament, where the Liberal Party holds a plurality of seats and depends on other parties’ support. The second-place Conservatives claim Trudeau could trigger an election in order to increase spending and taxes.
“There’s no question that if the Trudeau government ever regained a majority, they would raise the sales tax by three or four points,” Pierre Poilievre, the party’s finance critic, said.
Morneau’s office didn’t respond to a request for comment.
Wealth, Digital Taxes
The left-leaning New Democratic Party contends the pandemic is increasing concerns about inequality in Canada, making the time ripe for a new wealth tax on Canadians with over C$20 million in assets.
The Broadbent Institute, a progressive organization with links to the party, commissioned a poll in May that found 75% of respondents, including 69% of Conservative voters, support a wealth tax as part of an economic recovery plan.
“I’ve never seen a public opinion poll that indicated two-thirds of Conservative supporting a wealth tax—not even close,” Peter Julian, the New Democratic finance critic, said.
A French-style tax on digital revenue could also be in the mix. Trudeau said June 25 that the government was interested in taxing big tech companies, but it wasn’t “looking at it as a necessary way to generate revenue to get through. It’s just a question of tax fairness.”
The Organization for Economic Cooperation and Development, meanwhile, is trying to get 137 countries to agree to a plan to overhaul how the digital economy is taxed. “Canada intends to continue to work with its international partners on the issue of digital taxation,” the Finance Ministry said in June 23 statement to Bloomberg Tax.
Tax Breaks Instead?
But some business groups dismiss the notion of shoring up the government’s budget hole with corporate tax hikes. The federal government should instead focus on tax cuts and tax holidays to drive economic growth, they say.
For example, last month Alberta moved up a planned corporate rate tax cut, making it one of the lowest rates in Canada and the U.S. The pandemic recovery plan also included a refundable tax credit for companies that invest in research and development.
Tax reform that includes having digital companies increase their tax burden and reduces personal and corporate taxes constitutes the “types of discussions that should be had now,” said Patrick Gill, the Canadian Chamber of Commerce’s senior director of tax and financial policy.
The federal government went ahead with a 10% increase in the national carbon emissions tax in April, but should suspend a similar one coming next year, said Dan Kelly, president and CEO of the Toronto-based Canadian Federation of Independent Business, in an email.
Morneau should focus on creating tax credits that kick-start the economy by spurring consumer spending, including one to incentivize home renovations, said Dennis Darby, president and CEO of Ottawa-based Canadian Manufacturers and Exporters. His group is also calling for a sales tax holiday to spur spending and for a pause on any planned tax increases.
“Is this the time to introduce new costs into the system? Probably not,” Darby said.