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April 8, 2021 – The Federal Government’s spending and borrowing cushioned the impact of COVID-19 on Canada’s economy, but have put national finances on an unsustainable path. The upcoming budget must make tough choices to put Canada on a path back to fiscal stability.

As the health crisis abates, Canada faces two related challenges: supporting economic growth and slowing, and ultimately halting, increases in government debt. In “Recovery and Stability: A Shadow Federal Budget for 2021,” authors Don Drummond, Alexandre Laurin, and William B.P. Robson present initiatives to support the recovery and longer-term growth, while ensuring the federal government’s capacity to deliver services in the future.

The authors note that the Fall Economic Statement anticipated a federal debt ratio in the 55 percent to 60 percent range for the next five years, and show that current commitments for new spending, and higher interest payments, will send the debt ratio higher in subsequent years. The federal/provincial debt burden could exceed 100 percent of GDP in about a decade and continue rising thereafter.

“The 2020 Fall Economic Statement contained little to enhance Canada’s growth prospects and much to raise anxiety about mounting debt and exposure to adverse events, notably rising interest rates,” write the authors. “By contrast, this Shadow Budget would enhance opportunities for Canadian households and spur business investment. It would put the federal government on a path to budget balance within five years and gradually restore, over the next 20 years, its debt-to-GDP ratio to its 30-percent pre-pandemic level.”

Among the Shadow Budget’s key recommendations for Finance Minister Chrystia Freeland:

Supporting the Recovery

  • Support childcare with a geared-to-income benefit that reimburses up to 75 percent of expenses for low-income families.
  • Protect jobs by crediting $6 billion to the EI operating account in 2021 to keep EI contribution rates at their current level beyond 2022.
  • Bridge winding down of the Canada Emergency Wage Benefit and Canada Recovery Benefit with a temporary working bonus for low-wage workers.
  • Spur business investment with a temporary general investment tax credit, applying to all investments in depreciable assets, including intangibles.
  • Improve Canadians’ ability to handle healthcare costs with a more generous medical expense tax credit.

Supporting Long-Term Growth

  • Reduce the corporate income tax rate by two percentage points, from 15 percent to 13 percent, starting in 2024.
  • Establish a “patent box” that taxes income derived from intellectual property developed in Canada at a lower rate.
  • Reduce red tape by mandating annual administrative-burden reductions and widening the scope of the Red Tape Reduction Act.

Fiscal Prudence

  • Restore the GST rate to 7 percent in 2023.
  • Reduce expenses with departmental freezes on operating costs, and transition federal employees to jointly governed Shared-Risk Pension Plans.
  • Rationalize tax preferences, eliminating unproductive measures such as the first-time homebuyers tax credit and the tax credit for labour-sponsored venture capital corporations, and launching a comprehensive review of “disguised spending.”

Read the Full Report

For more information contact: Don Drummond, Stauffer-Dunning Fellow, School of Public Policy Studies, Queen’s University and Fellow-in-Residence, C.D. Howe Institute; Alexandre Laurin, Director of Research, C.D. Howe Institute; William B.P. Robson, CEO, C.D. Howe Institute; or David Blackwood, Communications Officer, C.D. Howe Institute, 416-873-6168, dblackwood@cdhowe.org.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.