The Liberals have a carefully crafted plan to gradually reduce Ottawa’s relative debt burden over the next five years, even as they spend tens of billions of dollars to deliver on campaign promises.
The party set detailed costs during the campaign, whereby it would add tens of billions in revenue and spend even more, but still keep the increase in net federal debt slightly less than the increase in GDP. This would allow the Liberals to hold on to their fiscal anchor of gradually reducing the ratio of net federal debt to GDP.
But the plan is about to crash into the reality of minority government, as both the NDP and bloc Québécois push for overly expensive measures that cause the deficit to skyrocket, and the federal debt burden upward.
Beyond the cost of buying support in the Commons, the Liberal plan is built on less-than-convincing assumptions about new sources of revenue that are beyond forecast in a pre-election baseline scenario from the parliamentary budget official.
Federal debt is manageable with GDP growth, says Poloz
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The biggest source of new revenue is also the most uncertain: billions of dollars to be deducted annually from tax dozers. But the PBO has already flagged its concerns that the Canada Revenue Agency may not be as successful as it has been in the past in being able to use the new funding for tax avoidance.
It is also uncertain whether the Liberals are forecasting billions of dollars to come in what’s dubbed the “Canada Recovery Dividend”. It would be a temporary tax on banks and financial institutions, separate from a separate levy of 3 percent for the largest banks and financial institutions on profits of more than $1 billion. But the Liberals have yet to say how it will be structured, beyond a broad statement that they will consult with the superintendents of financial institutions.
Together, those two tax measures are projected to raise $17.4-billion over the next four years, with more than two-thirds of the new revenue reflected in the Liberal’s campaign platform.
But those estimates are uncertain enough that some economists are already discounting how much tax revenue both measures will actually generate. “Both of these are somewhat dubious,” said Stephen Brown, Canada’s senior economist at Capital Economics.
They have adjusted their own models to reduce half the amount of revenue coming from CRA action and Canada Recovery Dividends. This results in a higher deficit, and a smaller increase in the ratio of net debt to GDP, as it is forecasting weaker economic growth than the PBO. Still, liberals will not stray too far from their promised fiscal anchor of a falling debt burden.
But spending demands from smaller opposition parties would incur a much higher fiscal toll, and result in the government breaking its pledge of the economy’s relative falling debt burden.
The most expensive Canada health transfer to date is a massive surge in demand for the block, the cash that Ottawa gives each year to provinces and territories. In a post-election news conference on Tuesday, Bloc leader Yves-François Blanchett told reporters that health care funding is the most pressing issue in the country.
The bloc wants the federal government to agree to premiers’ demand for an immediate increase in CHT to $28 billion, nearly two-thirds of the $43.1 billion currently budgeted for fiscal year 2022. In addition, the block wants to see an increase of at least 6 percent per year in transfers, up from the current floor of 3 percent. (During the campaign, liberals proposed increased spending on health care, but the price tag of those proposals is too small.)
Together, the two measures the bloc is pushing will see the cost of federal health transfers skyrocket over the next four years, as the chart below shows. CHT will reach $90 billion in fiscal year 2026, a 75 percent increase over the $51.7 billion cost estimated by PBO last month.
If the Liberals accede to that demand, the deficit would more than double to $32 billion in fiscal year 2026, which is projected to cost the party’s campaign a further $70-billion. And in that scenario the ratio of net debt to GDP will increase over the next four years.
For its part, the NDP campaigned on targeted health care spending that would fund specific priorities, most notably a pharmacare program that would reach an annual cost of $11.4 billion by fiscal year 2026. NDP leader Jagmeet Singh told reporters on Tuesday that he wanted to work with the liberal government to implement PharmaCare.
Block says it will also push for a recent increase in old age security benefits to apply to all senior citizens, not just those over 75. Extending those benefits would cost $1.6 billion in the next fiscal year and at least $6.6 billion a year later. He.
Rebekah Young, director of fiscal and provincial economics at the Bank of Nova Scotia, said she believes liberals will eventually resist pressure to add significantly to their spending plans, adding that they should be considered a net-debt-to-net-debt. -GDP ratio does not see much change. Party guesses.
Ms Young said liberals have shown “strong resistance” to increasing unconditional health transfers. As for PharmaCare, liberals may well put it up as a program of promise in the next election, she said.
But Ms Young said the liberals have demonstrated a willingness to spend any financial gains that may come from stronger economic growth than expected, allowing them to both launch new programs and adhere to their financial anchors. .
Long-term interest rates are also running slightly below forecasts for both the April Budget and the PBO election baseline, potentially driving down debt servicing costs in the coming years.
And the Liberals’ cost estimates from the campaign include $15-billion in contingencies, nominally for costs created by the coronavirus. But if those costs don’t come through, the Liberal government will have enough money to spend – without spoiling its financial anchorage.
Tax & Spend examines the intricacies and disparities of taxation and government spending.
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