The Carney government’s words aim at the right targets, and so do at least some of the budget’s dollars.Justin Tang/The Canadian Press
Many of my fellow members of the punditocracy find the budget to be a bit of a letdown. What happened to building the unimaginable at the speed of the inconceivable? Where’s the unthinkable on the timetable of the impossible? At the scale of the incomprehensible?
Where’s the revolution?
As the ex-politicos/current lobbyists who populate TV political panels have observed, it’s a case of a government overpromising and underdelivering. And as we learned on the first day of Political Marketing 101, lowering the bar before clearing it, is the way to go. Raise expectations? No, no, no.
I’m going to do some nitpicking of my own in a moment, but before we go there, can we all acknowledge something? Even if the ship of state has not performed a full 180-degree turn, it has turned. There has been a course correction. This is not nothing.
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The Trudeau government, which presented as New Democrats with expense accounts and a clothing allowance, has been replaced by the administration of Prime Minister Mark Carney, whose brand is progressive conservative liberalism.
The budget confirms it. It was further underlined when a progressive conservative Conservative MP from purple Nova Scotia, who calls himself a Red Tory, took advantage of budget day to cross the floor from Pierre Poilievre’s conservative Conservatives to Mr. Carney’s progressive conservative Liberals.
Recent polls, not to mention the last election, show that many Canadians are in a similar headspace. They want a tack away from the Trudeau approach and toward Conservative policies and concerns, but they don’t trust the Conservatives – and in particular Mr. Poilievre – enough to want them in charge of the course correction.
Mr. Carney has spent his time in office elaborating this new progressive conservative liberalism. Tuesday’s budget is the latest chapter.
The main economic problem facing Canada is anemic economic growth, owing to anemic business investment, which slows the rise of incomes and living standards. The budget’s rhetoric is all about addressing that. So is some of its substance.
Until 2014, massive private investment in new energy projects, especially the oil sands, and the demand for goods, services and labour that all that investment generated from coast to coast, masked a deep weakness in the Canadian economy. Outside of the oil patch, business wasn’t investing enough, while too many dollars were going into bidding up the cost of housing.
But global oil prices slumped after 2014, and Canada’s oil investment boom with it. Things were made worse by a Trudeau government that frowned on hydrocarbons. And then the second coming of Donald Trump threw tariff roadblocks into the middle of the continental supply chains.
Canada needs more investment – more investment in and by existing businesses; more investment in new businesses; more foreign investment; more domestic investment; and more income-generating infrastructure projects. The country has to catalyze – one of Mr. Carney’s favourite words – more private investment through smart public policy and, in some cases, the careful deployment of public funds.
Prime Minister Mark Carney says the federal budget is meeting the moment with global trade disruptions and deep divisions blanketing the country under a cloud of uncertainty.
The Canadian Press
At the same time, the public purse must devote fewer dollars to immediate consumption, so more can go to investment.
The government’s words aim at the right targets. So do at least some of the budget’s dollars.
There’s also a welcome recognition that a big part of the investment challenge has nothing to do with how much government intervenes and spends but rather how much it gets out of the way.
To make it easier to build, Canada must … make it easier to build. Some projects may need a sprinkle of public money to induce them into existence, but in many cases, the most impactful thing government can do is cut the permitting process and speed it up.
Sometimes the best government incentive is removing government disincentives. Team Carney talks incessantly about this; time will tell how much change it can deliver.
On the TV panels where former politicians opine on how current politicians should do politics, the most common knock against the budget was the absence of instant payoffs for impatient voters – no pre-Christmas stocking stuffers.
That is, in fact, one of the budget’s strong suits.
However, the Carney government started its life with a costly helping of political high-fructose corn syrup. It called this its middle-class tax cut – a reduction in the lowest tax bracket from 15 per cent to 14 per cent. It was promised during last spring’s election campaign, and implemented in the summer.
Have you already forgotten? The public accounts haven’t. The government and its successors will be paying for this electoral indulgence, year after year, until Kingdom Come.
Over five years, the cost will be $27.2-billion. That’s more than any new item in the budget, save for the new defence spending. It’s more than is being spent on the national emergency of boosting business investment. It’s twice as much as the government plans to spend on a passel of programs to “supercharge home building.”
And the value of that tax cut will never stop rising. Next year it will be worth $5.5-billion. By 2029-30, it will be worth $6.2-billion.
One of every five new dollars in this budget is devoted to it. But it does nothing to address the issues the government claims the budget is all about: encouraging business investment, raising long-term economic capacity and productivity, investing in the future and building a stronger Canadian economy.
The cut to the lowest income-tax bracket may have helped the Liberals in the last election, but it will contribute zero-point-zero per cent to strengthening the economy. It’s nice money to have in your pocket – a few hundred dollars a year for the average taxpayer – but don’t kid yourself that there’s any broader purpose or benefit. It’s not an investment in the future. It’s the opposite – a few hundred deficit-financed dollars per taxpayer, e-transferred from the future to the present.
Meanwhile, the much-ballyhooed “Productivity Super-Deduction,” a tax break to encourage businesses to invest in machinery, equipment, technology and other productivity-enhancing assets, gets roughly $19-billion over five years. The government says this will make Canada’s marginal effective tax rate on business the lowest in the G7.
However, most of the measures, and most of the money, were in the 2024 fall economic statement, though never implemented. Set all that aside, and the super-deduction gets just $280-million in new money next year and $420-millon a year by 2029-30.
The Carney government should have spent more on supersizing the business investment deduction. It could have financed it by forgoing the political catnip of the middle-class tax cut.
Nearly half of the budget’s new money goes to defence. It’s necessary. It’s also unclear how well the money will be spent and to what extent it will be used to foster viable production in Canada – or give birth to costly boondoggles. It will all come down to execution.
The budget also maintains the government’s focus on using public money to get more housing built, with $13-billion over five years for the Build Canada Homes initiative.
But the bigger immediate contribution to moderating housing prices, particularly in the rental market, has come from scaling back temporary immigration, begun late in the Trudeau government. The budget doubles down on this, announcing a further reduction in new temporary arrivals in the years to come.
This is another example of a policy whose impact comes not from government spending more, but instead doing less. A recent report from TD Economics finds that the reduction in temporary immigration numbers, after the record run-up between 2021 and 2024, has lowered the unemployment rate by a percentage point, compared to where it otherwise would have been, and is also lowering rental and other housing prices.
Beyond that, the government intends to downsize the public service, after a decade of hiring that far outpaced population growth, and scale back program spending that isn’t classified as “investment.” It’s mostly unclear how the intended tens of billions of dollars in savings will be achieved. This, too, will come down to execution. It will happen – or not – over many years.
The deficit is way up, but given Canada’s good financial position, that’s not a problem in the short to medium term. However, the government will surely have other initiatives it wants to spend on next year and the year after that. Making it add up over the long term is possible, but far from automatic.
The bottom line is that the budget has a lot of new money for defence and a lot of money for an economically useless income-tax cut, but less – far less than months of rhetoric promised – to encourage economically productive investment.
The Carney government has turned the Titanic. More turning is still needed.