Canada’s 2017 Federal Budget: Politics over Economics

Canada’s 2017 Federal Budget: Politics over Economics

Dr. Kui-Wai Li
The Kui-Wai Consultancy for Economic Development, Inc.
February 28, 2018

I Introduction

The theoretical and apolitical role of every economy’s annual budget is to balance the economy by promoting long term growth to enrich the future capacity of the economy and avoid overheating in good economic times, but attempts must be made to rescue the economy at a time of economic recession to avoid severe hardship. The rest should be left to the private sector because investment in the private sector should be the driving force to growth and output expansion. The government should exercise market-friendly policies so that investment will be attracted and not lost to neighboring economies. However, modern governments do not often follow any economic principles when the budget becomes a political instrument for gaining votes for pleasing certain interested groups. The Federal 2018 Budget in Canada does exactly that. By making all kinds of government spending, in the form of investment, it is simply clear that the Liberal government aimed to attract votes across the different walks of life, except for the business sector. Learning probably from Greece, the political goal could be to increase national debt by over spending for this generation and leave the fiscal bomb to the next government.

“Building a Strong Middle Class” is the theme of Canada’s 2017 federal budget released on February 27, 2018, by the Liberal government. Being the 150th anniversary of the nation of Canada in 2017, there was much celebration to be included in the budget, and indeed, it briefly highlighted some success in the process of nation building. Reading the 2017 budget prepared by the Liberal government conveyed the idea that Canada has a very caring government to the extent that the government boldly took the initiative to draft the development path for every and all citizens. Other than the wealthiest group, every individual group shall benefit and receive some lunch from the government. In the jargon of political economy, this is known as government intervention and big government that decided everything for its citizens.

II The Middle Class

Using the “middle class” as a theme, there is no clear definition of a “middle class” in Canada. Will it be defined professionally in terms of employment categories or in terms of income received? One can point several queries in the budget that relates to the benefit provided to the “middle class”. One would be the Canada Child Benefit (CCB), will there be statistics to show whether “middle class” is the largest group of child-bearing families? Or “middle class” parents do not have children of their own or prefer to remain single and not having families. In the example shown on page 27 where a single-parent mother who was earning $30,000 a year would be given assistance so that her son could buy a new bike and related accessories. Firstly, an annual income of $30,000 was considered as “middle class”, and the assistance was no different from that of welfare benefit. Furthermore, the data shown in Chart 3 shows growth of nominal retail sales and household consumption and disposable income, but how much of the retail sales and household consumption were the direct benefit of the CCB had not been made clear.

In relation to tax cuts, the 2017 Budget on “A fair and efficient tax system for Canadians” says that “the Government took decisive action to make the tax system fairer. The Government’s first action was to raise taxes on the wealthiest one per cent, in order to cut taxes for the middle class. When middle class Canadians have more money to invest, save and grow the economy, all Canadians benefit”. How can “all” Canadians benefit when “the wealthiest one percent” had to suffer a higher tax? Should the tax system work the reverse and promote and enlarge more wealthy people? Could the middle class one day become one of the top wealthiest one percent?

The 2017 Budget basically takes on a socialist, pro-welfare approach of large government and intervention, and misunderstood the ingredient of “income inequality”. The irony is that on the one hand, the government is spending or “investing” so much on young people, higher education, encourage innovation and promote technology, all of these would create inequality of income among those who benefit from the various government scheme. The idea is to nurture more able individuals, whom will receive different income over time. Yet, on the other hand, the government is complaining about “income inequality” and intended to penalize the able individuals.

III Government Investing or Spending?

In Figure 1.1 in the 2017 Budget (page 78), the Government illustrates the Economic Strategies based on “a value chain approach”. There are three bottlenecks in the economic strategy: Need to improve investment in research and development, lack of skilled workers limits expansion, and need better market access to expand exports. Other than the focus on the middle class, much of the budget talked about nurturing a stronger work force, advancement in technology and innovation, enhancing skills in the youth program, additional funding on higher education, life-long learning for individuals to retain their skills, and many more. It would be true to improve the quality aspect of the work force, but there is no mention on where investment would come to Canada to provide sufficient jobs and employment. Nothing was said on Canada’s economic competitiveness, no policies that provide incentives to investment to Canada, though there is the program aimed to aid small- and medium-sized enterprises. Indeed, the 2017 Budget has largely ignored the economic health and attractiveness of the business sector. With the rise in minimum wage, for example, how can Canada compete in attracting investment, both locally and from foreign sources?

There can be several consequences. Firstly, there would be workers with qualifications but not sufficient jobs, leading to higher unemployment, unless wage would fall. If not, increase in unemployment would lead to more welfare recipients. Secondly, by focusing on the young workers, they would soon displace the more experienced, higher paid elderly workers, thereby speeding up the dependence of the aging population. Thirdly, by focusing so much on the technology side of human capital, young people whom are not in science and technology disciplines, such as graduates in history, arts and other humanity subjects would face a tougher job market as there will be less job opportunities.

The 2017 Budget planned to spend massively on infrastructure development, such as land transport, but how much of the spending would be geared to construction of new infrastructure, or merely handing more resources to those institutions. There was much discussion and elaboration on how much to spend and who would be the recipients, but there was no discussion on the need for these spending, which were dressed up as “investment”.

To be fair, there are some advantages in the 2017 Budget, for example, the intention to encourage the various minorities to participate more actively in the Canadian economy, the need to reach out to the remote regions through improvement in transport, education and other connections. However, results are yet to materialize. It does have the credit of creating harmony in the Canadian society.

IV Political Goal

The Honorable Mr. Scheer, Leader of the Official Opposition in the Canadian Parliament appropriately remarked that “The reality is, after almost three years of Justin Trudeau: never has a Prime Minister spent so much, to achieve so little”. The answer is simply that the budget is used as a political instrument to gain votes in the next election. By spending, or investing necessarily or unnecessarily, those who gained from having a bit of the free lunch will be pleased with the giver. In this budget, the giving may not be most critical, but the piling up of national debt, the size of which went contrary to what the Liberal Prime Minister promised in his election pledged three years back. The piling up of the national debt can serve several political goals. Should the Liberal government lose in the 2019 federal election, the fiscal mess will be passed on to the successor, probably the Progressive Conservative Party. Should the Liberal come back, it will just pass on the debt to future years. The sitting Prime Minister remarked that Canada would balance its budget in 2045. Such a remark cannot be serious as no government in market economies can make predictions or judgement for over such an extended period.

Is Canada becoming another Greece where its welfare program is so large and rigid that however much rescue was given by the European Union, Greece still cannot get its own economy back on feet as industries were lacking, investments were not that forthcoming, and tourism seemed to be the largest business in Greece. Fortunately, Greece could receive rescue aid from the European Union, Canada would not have any economy coming to its aid should the growing of national debt results in economic weakness and lost in competitiveness. The political intention of over-spending on this generation but leaving the future generation to absorb the debt is suicidal to Canada. Spending for the sake of spending is fiscally irresponsible, though the political gamble would be to collect more votes.

V Conclusion

If the political leaders are genuinely in promoting the economy of Canada, it must make sure that the “supply-side” factors function more effectively and efficiently and leave the business sector do its job. Other than education and human capital enhancement, and technology advancement, which are basic provisions in all modern economies, market-friendliness is a crucial “supply-side” instrument. By imposing blames on the wealthiest one person is not a fiscal budget that aims to ensure all can benefit from the Canadian economy. Employers are the pioneers in businesses and they employ. Using the criterion of “ability” and not wealth, it would be right to promote more “able” people, whom will earn more than others. Hence it is a political irony for a government to “punish” the able on the one hand, but on the other hand making spending to promote more able individuals.

While the government is aiming at equalizing pay for women to ensure equality, why unequal treatment is imposed on the wealthiest? Are they not law binding citizens? If the tax rates and tax system are sufficient friendly, would they still send their capital abroad? Which should be the cause: a harsh tax structure or some are too wealthy?

As individuals are trained differently and equipped with different endowment when they enter the work force, it would be absurd to impose the political criterion of “equality” knowing that pays are unequal for different jobs or even for the same job if the job was conducted by different workers. Typically, an experienced worker would have a higher pay than an inexperienced worker. Such a different in pay is known as “incentive”, which serves as an engine for workers to make progress, either through job switching, seeking better qualification or looking for higher pay elsewhere.

Ultimately, a fiscal policy must put economics ahead of politics, because it is the job of the government to steer the economy to new heights through the deployment of tax revenues, provision of business incentives and nurture a competitive economic environment. By spending in all directions does not necessarily mean the pursuit of an effective economic strategy, while its political intention and ambition is too obvious. Promoting an effective economic strategy requires consistency in resource deployment and ignoring the health of the business sector will become a missing juggle.

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