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Equality and Growth: 2018 Budget Analysis and Commentary

The government’s 2018 budget, Equality and Growth: A Strong Middle Class, reflects the government’s political positioning as they pass mid-mandate and begin preparing for the 2019 election. It stays the course in terms of the government’s finances but lays down a distinctly progressive agenda for improving productivity while preparing Canadians for the economy of the future.

The Liberal government is preparing for the next election by seizing the centre-left.

The budget’s themes match the new expenditures. With more room in the fiscal framework than expected, even after new spending was announced in the Fall Economic Statement, the Liberal government allocated a significant portion of its spending to new programs or program redesigns that improve outcomes for Canadian women.  Additional themes for the Liberal government, including growing the middle class, fighting climate change and reconciliation with First Nations, are still the government’s policy priorities, each with a chapter in Budget 2018.

This “gender budget” should be understood as a political branding tool as much as a financial plan. A successful budget will do that for a government. The theme of growing the middle class has been central to Liberal messaging. Budget 2018 showcases a shift from “growing the middle class” to “growing the middle class by supporting Canadian women.” The political strategy with this expansion is to cement the Prime Minister’s appeal among women and young working families. This demographic edge was a key component of the Liberal’s success in the 2015 election and lays the groundwork for a year of policy announcements on supporting women in the workforce.

Budget 2018 outlines the federal government’s proposed modifications to the small business tax changes which prompted controversy in 2017. Included in these modifications are more constrained measures to subject passive income earned by Canadian-controlled private corporations to greater taxation. These proposals will contribute to increased federal revenues and help account for the larger than expected room in the fiscal framework for Budget 2018.

Tax changes proposed in the Budget impact a range of matters, including international tax compliance, special anti-avoidance measures and the taxation of passive investment income. (McMillan LLP will be releasing an analysis of these changes in the next couple of days; please email lynn.marks@mcmillanvantage.com to let us know if you would like to receive a copy.)

The government makes a significant change to the payment system for federal employees by transitioning out of the much-maligned Phoenix program. This is noteworthy because it will address a political problem while creating a significant amount of room in the fiscal framework for a system that that was originally sold as a cost saving and efficiency measure.

By appointing an advisory council led by the former Liberal Health Minister of Ontario, the budget signals the government’s intention to implement a national pharmacare program. Such a program will have broad support among Canadians.

Other important policy initiatives address a range of stakeholder interests including the financial sector review and the accompanying – and often complex — policy issues to build a modern, sustainable financial system.

There is a considerable narrative on trade and NAFTA in the budget but no new insights into how the government will respond to the ongoing uncertainty surrounding our relationship with the United States, which isn’t surprising given the status of the negotiations led by Minister Freeland. The government also focuses on expanding the Canadian trading relationship with blocks of countries in the Asian/Pacific region; this government prefers multilateral, rather than bilateral, trade agreements.

The scope of projects for the Canadian Infrastructure Bank are hinted at in the budget’s expenditure tables, with green infrastructure and public transportation as two key areas of investment. Improving Canada’s cybersecurity is a highlight along with a horizontal policy review of innovation programs.

What isn’t included? Critics suggest that the budget does not address the competitiveness of Canada’s corporate tax rates relative to the recent large reduction in U.S. corporate taxes. It appears that Minister Morneau has taken a cautious approach on this issue, preferring to gauge the impact of the U.S. changes first. It is worth noting that Canada’s combined federal and provincial corporate tax regimes remain fundamentally competitive on a global scale.

Finally, the government has not laid out a plan for returning to a balanced budget and thus has left itself vulnerable to criticism to charges of inaction during a period of relative economic strength. Critics argue that Canada will be more fiscally vulnerable when the inevitable economic downturn occurs. In choosing this path the government has set the stage for a debate with the Conservatives on economic policy, with the Liberals arguing the government needs to do more to help families challenged by the global economy and the cost of living, and the Conservatives arguing for less spending and more progress on reducing the deficit and reducing debt.  It is a debate the Liberal Government wants to have.

FISCAL MEASURES

  • There is $21.5 billion in new spending, a number larger than most analysts projected. This reflects the strategic choices the Liberals are making leading into the 2019 election.
  • Deficit is less than projected this year at $18.1 billion, while the government projects an increase in the debt by $98 billion through 22-23.
  • The Government is projecting the debt to GDP ratio to decline to 28.4% by 2022.
  • Real GDP growth is projected to decline: 3.0% in 2017, 2.2% in 2018, 1.6% in 2019, 1.7% in 2020.
  • Inflation projections are static at 2%.


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