Federal Budget 2023: The Big Spend

March 29, 2023

Imagine that your family has been living on credit cards over the past few years and all of a sudden you had the good fortune of some extra revenue coming in the door.

A smart household would likely pay down some of that debt and get its finances back in order. The last thing you’d want to do is take that windfall revenue, spend it all, and take out an extra line of credit to keep the spending binge going, right?

Well, that last scenario is exactly what the Liberal government has done in its most recent budget. Government revenues have surged in the past two years due higher commodity prices and inflation. Instead of tabling a budget that would see Canada tucking some of those funds away and saving for a rainy day, the federal government has gone on a spending binge – partly due to its inherent DNA as a government focused on reallocating capital rather than creating new wealth, and partly due to its political survival instincts as it relies on the NDP for support in the House of Commons.

Here’s the Centre Ice Canadians key takeaway from this budget: the Liberal government is spending way too much, taking big bets on one sector of the economy that may or may not pan out, and on a path that could negatively impact our country’s financial position for decades to come.

Here are our key takeaways from the 2023 federal budget, including the good, the bad and three things that are truly needed today.

What’s Good:

• INCOME TAX RATE STABILITY: There were no broad-based income tax rate increases, despite rumors that a higher top marginal bracket might be coming. There was also no change to the capital gains inclusion rate.

• PREDATORY LENDING: It’s now a criminal offence to charge more than 35% interest, down from 47%. That’s good, but still way too high. The fast-cash predators feed on the most vulnerable Canadians. There’s no reason these rates shouldn’t be pegged in line with common credit card rates, today around 20% on unpaid balances.

• FIGHTING FOREIGN INTERFERENCE: The RCMP gets an additional $48.9 million (a miniscule amount in federal spending terms) to combat foreign interference, by protecting diaspora communities from harassment and intimidation, increasing its investigative capacity, and more proactively engaging with targeted communities. Ottawa will also spend $13.5 million five years and then $3.1 million after that to establish a "National Counter-Foreign Interference Office" – a nice idea, but yet another government bureaucracy. Investments in combating foreign interference are welcome, but very poorly funded, and it is not clear that given evident issues within the RCMP and our other intelligence agencies that our bureaucracy is ready to embrace this task.

• AUTOFILE: Expanding the income tax auto-file program will help to ensure that more Canadians gain access to benefits they are entitled to. Many benefit programs are administered by CRA, with payment only following after a tax return has been filed. For many low-income Canadians, this creates an unworkable barrier to accessing supports. By expanding the auto-file program to an increased base of eligible Canadians, Budget 2023 helps to level the playing field for those who may not otherwise be in a position to file their own tax return using ordinary means.

• DENTAL CARE (Maybe): In theory, expanding a public dental care option for low-income Canadians is good. Studies consistently show that oral health is an integral part of overall health. The key question is whether the Liberals will be able to effectively manage and rein in costs, as the projected five-year costs are expected to more than double from $6 billion to $13 billion. As well, this program further encroaches on provincial responsibility, to be managed by the federal government – replicating provincial bureaucracies who already manage dental programs. The road to hell is paved with good intentions – this might be the case here.

What’s Bad:

• ·THE DEFICIT: A deficit that will clock in at $40.1 billion in 2023-24, nearly $10 billion more than forecast, and a budget that will no longer be balanced by 2027, as previously promised. Fiscal anchors have been thrown away. The problem is not revenues – which are forecast to be $25 billion per year higher over the next five years. Instead of paying down debt, or simply doing nothing and not spending new funds, the Liberal government has gone deeper into the national credit line with this budget. What could possibly go wrong with this strategy?

• REACTIVE BUDGETING: Whether it be the share repurchase tax or significant tax incentives for green infrastructure, this Budget is clearly a reaction to U.S. policy under the Biden Administration. There is little effort on the part of this Government to create its own bold, growth-oriented agenda; we are simply playing catch-up with the United States – and to our own detriment. It seems unlikely that Canada can win the long-term subsidy/targeted-incentive battle. We need a government focused on foundational principles and policies that will stimulate sustainable growth; one-off, reactionary policies are a band-aid solution to a gushing wound, as evidenced by our growth projections and trajectory.

• DEBT SERVICING: The Government expects to spend $43.9 billion in debt servicing in fiscal 2023-24, with that number expected to rise by $50 billion in five years. That’s assuming there are no more interest rate hikes, shocks to the global financial system, wars, climate events or anything else that could skew that projection. That $50 billion number has more than doubled since 2019-2020.

• TOTAL DEBT: While the Liberal Government likes to compare Canada’s debt/GDP ratio to other western countries, what we forget is that aggregate Government debt is what really counts. That amount includes all the borrowing of the provinces, which today is more than $2 trillion combined. Keep in mind that many of the key priorities facing Canada today – health care, resources – are managed at the provincial level, whereas they are at the national level on other countries. Bottom line: Canada needs a clear plan to get its overall debt burden under control.

• DEFENCE BUDGET: NATO members are committed to spending 2% of GDP on defense. The government was at 1.3% in 2022-2023 and has promised to reach 1.4% by next year, but there is no sign that the Trudeau government has grasped the rapidly changing world around us. A tiny increase in defense spending, a multi-year plan to replace the munitions already transferred to Ukraine: Canada continues to treat national defense as an opportunity to allocate contracts, without any vision of where our country currently stands in the world, what challenges we face, and how we will support our allies while defining and defending our national interest.

• HEALTH CARE AND EDUCATION: The Liberals have continued to act like political magpies, attracted to the shiny and new over strength and sustainability. The Canada-Wide Agreement on Early Learning and Child Care is facing enormous pressures because of its popularity but was hardly mentioned in the budget speech. The increase in the program’s budget will in no way cover the needs of the provinces, who share the costs of the program, who will be left to carry the can for the program’s lack of resources. While embracing a model that will see dentists compete to access new federal funds, there are no plans for reforms that would see other healthcare professionals compete as part of our single-payer model. This is hypocritical. Family doctors compete for business as small or medium-sized enterprises, with payrolls and rent. Now dentists will start to do the same. Why is competition not suitable for clinics offering surgeries and other procedures? As long as healthcare is free on point of delivery, competition in service delivery should be encouraged: there is no conflict between a public system and competition between providers to increase quality and lower costs. When the foundations of our healthcare system are cracked, the only responsible action is to make sure that we have already built is repaired, before expanding into new areas. When every Canadian has access to primary care – ideally as part of a collaborative care network where all medical professions can work to the full scope of their practise, including physicians, physician assistants, registered nurses, licensed practical nurses, nurse practitioners, and pharmacists – that is the time to start talking about adding on to our system.

• CRIME: At a time when crime rates are rising, driven by the meth epidemic and a chronic shortage of affordable mental health services, the RCMP is increasingly responsible for policing large parts of our country. Those services are under resourced, leaving many Canadians without protection from threats to the physical security and the security of their property. Where is the plan for getting soaring crime rates under control, and to make sure Canadian streets are safe? We need a plan that’s tough on crime, and tough on the causes of crime.

• GAAR REVISIONS: The proposals to modify the General Anti-Avoidance Rule make an already nebulous standard even less clear. If passed into law as proposed, the GAAR will include an “economic substance” test for determining whether there has been a misuse or abuse of specific provisions of the Income Tax Act or the Income Tax Act as a whole. The language used in the proposed draft legislation is vague, which will only lead to more uncertainty for taxpayers as they seek to structure their affairs. Given the clear need for Canada to promote economic growth, increased uncertainty in the tax system is a net negative – even if the government believes that this proposed legislation will help them to target aggressive tax planning that isn’t currently subject to the GAAR or a specific anti-avoidance rule.

Three Things Canada Needs Now:

• REIN IN SPENDING: Fiscal discipline has been lost under the current government. Canada’s debt to GDP ratio will increase this year – that’s the same metric that the government previously touted as proof that deficits wouldn’t hurt Canada’s bottom line. By its own admission, it is failing to manage Canada’s finances. And in a high interest rate environment, this will only worsen as it borrows more money to fund its spending spree.

• FOCUS ON KEY PRIORITIES, NOT EVERYTHING UNDER THE SUN: Instead of scattering money and promises in an attempt to curry favour with various groups, or keep the support of the NDP, the government should pick a few priorities and focus on those. Cost of living, health care, defence and debt reduction are four which should be top of mind.

• FIX CANADA’S WHACK-A-MOLE TAX POLICY: The Government was concerned that recently enacted Bill C-208 (dealing with intergenerational business transfers) introduced tax planning opportunities that went too far. In response, they have proposed further amendments to the relevant sections of the Income Tax Act that make an already-complicated area of law even more complicated for everyday taxpayers. There is no effort by this Government to re-examine what we tax, how we tax, and how much we tax. The solution to every perceived evil is a never-ending cycle of incremental amendments to legislation, making ongoing compliance more costly and time-consuming for the small businesses and individuals that drive our economy. Canada hasn’t completed a comprehensive review of our tax system in decades.

Written by Dominic Cardy, Tasha Kheiriddin & Rick Peterson

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