Large deficit on the horizon, says U of T's Christopher Cochrane

Details of the new federal government’s first budget have begun trickling out, giving Canadians a sense of what Finance Minister Bill Morneau will unveil on March 22. So far Canadians have learned that the Liberals intend to keep the retirement age at 65, reversing the policy favoured by the former Conservative government.

Some fear a hike in capital gains taxes. The federal government also appears ready to increase funding for municipalities and fast-track infrastructure projects. Last week in New York, Prime Minister Justin Trudeau said the government has opted for “investment” rather than “austerity.” And during a televised town hall meeting he expressed a preference for laying a "foundation for better productivity over the long term" over supplying "just an influx of cash.” But investing in long-term growth could mean a higher-than-promised short-term deficit.

U of T News turned to Associate Professor Christopher Cochrane of political science for a quick budget preview.

What should we watch for in this budget?

The Liberals made a number of promises during the campaign. They have done a pretty good job so far of checking off the commitments that they could fulfill right away. It was obvious in the very early days of the government, however, that they were not going to be able to live up simultaneously to their taxing, spending and deficit commitments. Something would have to give.  

So far, it’s pretty clear that the government will give up on its deficit commitment in order to keep its tax-cut and spending commitments. It’s pretty safe to say that the deficits will be much larger than the Liberals promised in the campaign. 

Can you explain the hike in the capital gains tax? What is it and whom will it affect?

In a nutshell, wealthier people are more likely to earn a greater proportion of their income from capital gains and a lower proportion from wages. The tax rate on capital gains is lower than the rate on wages. Raising the tax rate on capital gains will affect wealthier Canadians.

How will a retirement age of 65 affect the budget?

I don’t know the budget implications in the short-term. In the long term, the government will have to do something on this file. People live longer than they used to and have fewer children. As a result, our society is aging. There are different ways of managing the economic implications of these changing demographics. A part of the Conservative plan was to raise the retirement age to 67. It looks like the Liberals will undo this change. I suspect they will offer something in its place, which could take the form of increasing mandatory contributions to the Canadian Pension Plan.

The Liberals had promised during the election to cap deficit at $10 billion. Are you saying that they won’t be able to meet that goal? How large will the deficit be?

No [they won't meet that goal]. Not without breaking a large number of their other campaign promises, not to mention the many new promises that they’ve made since getting elected. I doubt that they will be even close to a $10-billion deficit.
 

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