Canada’s ‘tax the rich’ plan leaves big debt risk untouched, analysts say

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Analysts say Prime Minister Justin Trudeau’s new government is set to impose higher taxes on Canadians, which will help deliver on some campaign promises, but not enough to start paying off the country’s record levels of debt. , which will put Canada in the grip of the next economic crisis. .

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This could be a risky strategy for the country, which during the pandemic piled up new debt at a faster rate than its peer group of seven. High levels of indebtedness could limit Canada’s ability to manage long-term challenges that require massive government funding, such as the transition from a fossil fuel-dependent economy to a green one.

Analysts say the high debt-to-GDP ratio in the aftermath of the pandemic means Canada has little room to respond to the next crisis, whether related to economic, trade, climate or health.

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Essentially, Canada’s large debt burden “doesn’t leave significant financial space to address major new shocks,” said Kelly Bissett-Tom, director of America’s Sovereign Ratings at ratings agency Fitch Ratings.

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Fitch has already removed Canada from its triple-A credit rating, but S&P Global Ratings and Moody’s Investors Service still give Canadian debt the highest rating.

Ahead of his re-election last month, Canada’s liberals promised $78 billion in new spending over five years, about 4 percent of GDP, partially offset by $25.5 billion in new tax revenue over the same period, mostly Targeting tax evasion, wealthy individuals, large banks and insurers.

The idea is to tap those who have weathered the pandemic best to pay for new spending on everything from mental health care to school lunch programs. But those taxes won’t help pay off Canada’s record $1 trillion national debt, nor will they be enough to balance the budget.

This becomes riskier because at some point the cost of carrying that debt will increase, and a future government may need to cut services or raise taxes further to offset that burden, some economists warn. Huh.

“Nothing related to the cost of the pandemic… will be paid for by the present generation. And it’s very adventurous and risky,” said Don Drummond, a Stauffer-Dunning fellow at Queen’s University.

tax the rich

Canada is not unique in looking to tax the wealthy to pay for COVID-19-era expenses. But countries like the United Kingdom are attempting to start paying down debt as part of their new tax plans, and Western European nations are indicating that public debt levels will not rise forever.

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Canada’s gross debt-to-GDP ratio jumped 36 percent to 118 percent last year, the biggest increase ever for the G7 group of wealthy nations.

That ratio, which includes all provincial and federal government debt, is set to drop to 113 percent by 2022, based on projections of economic growth rather than debt repayments.

Economists at BMO Capital Markets said in a post-election note that reducing Canada’s debt as part of the economy over time brings some sort of fiscal discipline, but breaking that financial “anchor during challenging times.” is decided”.

Trudeau’s liberals failed to win a majority in the September 20 election and continued to rely on left-leaning New Democrats to pass legislation. That party could pressure the liberals to spend more in return for their support.

The Liberals have promised to raise the corporate tax rate for big banks and insurance companies, as well as introducing an additional payment by those same businesses to help pay for the economic recovery. The government is also planning to introduce minimum tax rules for the top earners.

Trudeau’s liberals would need the support of at least one other party to pass any new legislation, such as changes to tax laws. The NDP is in favor of increasing taxes on big businessmen and the very rich.

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“We had a lot of fiscal space, a lot. And we used a lot of it on the pandemic,” said Laurentian Bank senior economist Dominique Lapointe, referring to the government’s record stimulus to support the economy.

“People are worried now because we have used that financial space and we are still introducing new measures.”

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