Canadian governments never went for U.S.-sized tax cuts, but the C.D. Howe estimate still puts Canada's federal deficit around 3 per cent of GDP.Sean Kilpatrick/The Canadian Press
They say the only certainties in life are death and taxes. The old saw needs an update. For several decades now, something else has been on the list of political certainties: Tax cuts.
Prime Minister Mark Carney hopes to find a way to significantly reduce federal government spending – but of course without touching any of the many things voters want. And while spending a lot more on national defence.
After a decade of rapidly increasing federal spending and hiring, the exercise is necessary. It’s also unlikely to be sufficient.
A year ago, the federal deficit for 2028-29 was projected to be a tidy and manageable $20-billion. But with all the planned extra defence and other spending (and tax cutting – more on that in a moment), the C.D. Howe Institute says Ottawa is facing a deficit that will grow to $92.2-billion this year, and remain stubbornly high thereafter.
Ottawa’s fiscal situation is nowhere near as dire as Washington’s – the C.D. Howe estimate puts the federal deficit around 3 per cent of gross domestic product, whereas the Trump administration has locked in perma-deficits of around 7 per cent of GDP. The U.S. is in a deep fiscal hole and digging furiously. We need to avoid that.
However, a budget has two sides: Revenues and spending. In seeking a path to balance, there’s no reason to focus exclusively on spending. We can also – I know this will infuriate some readers – talk about how to tax more, or not tax less.
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U.S. President Donald Trump just signed a bill adding trillion of dollars to the deficit over the next decade. The reason is tax cuts, heavily tilted to upper-income Americans.
It’s part of a pattern in American politics. Former president George W. Bush inherited a surplus, which he immediately turned into a large and persistent deficit, through tax cuts. Mr. Trump cut income taxes during his first administration, and has now cut them some more. The result is a stubbornly large deficit, weighing in at 6.4 per cent of GDP last year, even before the latest tax reductions.
Most American voters seem to be under the misapprehension that their country suffers from high taxes. The opposite is true. Compared to the rest of the developed world, the U.S. is an outlier. In 2023, revenue for all levels of government in the U.S. was 29.2 per cent of GDP, according to the International Monetary Fund.
Government revenues in the most highly-developed countries in the European Union are over 40 per cent of GDP. In some of the most prosperous, including Sweden, Austria, Finland, Denmark and Norway, that figure is close to or over 50 per cent. (Canada’s figure: 41.9 per cent).
Washington has a revenue problem. It could eliminate its budget deficit tomorrow, through higher taxes alone, and still have lower taxes than all of those leading EU countries.
Canadian governments never went on a U.S.-sized tax-cutting tear, but it’s easy to forget how many times we have cut taxes over the last quarter century, and how that contributes to the budget gap.
The most recent example comes from the Carney government itself. Even as it committed to spend and invest more, it also put an income tax cut at the heart of its platform. The one percentage point drop in the lowest tax bracket will cost $5.8-billion a year. Politically popular as it may be, it serves no economic purpose.
Or consider the Trudeau government’s increase to Old Age Security for anyone over the age of 75. Not a tax cut, but still a poorly targeted giveaway. The measure will cost $2.5-billion this year.
In the 2015 election, the Liberals won on a platform that included a cut to the second-lowest income tax bracket. The annual cost at the time was $2.9-billion; factor in inflation and population growth and that’s around $4-billion a year now.
And nearly two decades ago, the Harper government shaved two percentage points off the GST. That will cost the federal government about $22-billion this year, which by itself is enough to pay for increasing defence spending from 1.4 per cent of GDP to the promised 2 per cent.
The annual Report on Federal Tax Expenditure has other examples. The Harper government introduced pension-income splitting for senior couples; it costs $1.9-billion a year. Corporate dental and health benefits have long been a tax-free benefit, worth $6-billion a year. The non-taxation of capital gains on principal residences, regardless of the price of the house or the wealth of the owner, will be worth $13-billion next year.
It has become politically advantageous to act like the budget ledger has only one side. That doesn’t make it true.