Canada's 'tax the rich' plan leaves big debt risk untouched
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[October 18, 2021] By
Julie Gordon and Fergal Smith
OTTAWA (Reuters) - Prime Minister Justin
Trudeau's new government is set to impose higher taxes on Canadians,
which will help fund some campaign promises but are not broad enough to
also start paying down the country's record levels of debt, leaving
Canada vulnerable to the next economic crisis, analysts say.
This could be a risky strategy for the country, which piled on new debt
at a faster pace than any of its Group of Seven peers during the
pandemic. The high level of indebtedness could limit Canada's ability to
manage long-term challenges that require massive government funding,
like transitioning from a fossil fuel-reliant economy to a green one.
A far higher debt-to-GDP ratio post-pandemic means Canada has far less
wiggle room to respond to the next crisis, be it economic, trade,
climate or health-related, analysts say.
Essentially, Canada's large debt burden "does not leave significant
fiscal space to offset major new shocks," said Kelli Bissett-Tom,
director of Americas sovereign ratings at rating agency Fitch Ratings.
Fitch has already stripped Canada of a triple-A credit rating, but S&P
Global Ratings and Moody's Investors Service still give Canadian debt
the highest rating.
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Ahead of their re-election last month, Canada's Liberals pledged C$78
billion ($63.1 billion) in new spending over five years, about 4% of
gross domestic product, partially offset by C$25.5 billion in new tax
revenues over the same period, mostly targeting tax evasion, wealthy
individuals, big banks and insurers.
The idea is to tap those who best weathered the pandemic to pay for new
spending on everything from mental healthcare to school lunch programs.
But those taxes won't help pay down Canada's record C$1 trillion
national debt, nor will they be sufficient to balance the budget.
This becomes risky because at some point the cost of carrying that debt
will rise, and a future government may need to cut services or raise
taxes further to address that burden, some economists warn.
"Nothing related to the cost of the pandemic ... will be repaid by the
current generation. And that's very bold and risky," said Don Drummond,
the 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 spending. But countries like the United Kingdom are making
an effort to start paying down debt as part of their new tax plans, and
Western European nations are signaling public debt levels won't rise
forever.
[to top of second column] |
![](../images/101821PIX/2021-10-18T101648Z_2_LYNXMPEH9H0HJ_RTROPTP_4_CANADA-ECONOMY-TAXATION_small.JPG)
NDP supporter Sophie Reynolds wears a "Tax the Rich" mask during an
election campaign visit by New Democratic Party (NDP) leader Jagmeet
Singh in Welland, Ontario, Canada September 15, 2021. REUTERS/Nick
Iwanyshyn
![](http://archives.lincolndailynews.com/2021/Oct/18/images/ads/current/countryfinancial_lda_PPP_2018.png)
Canada's gross debt-to-GDP ratio jumped 36% last year to 118% amid massive
government transfers of aid to individuals and businesses, by far the largest
increase of the G7 group of wealthy nations.
Graphic: Gross debt-to-GDP of G7 nations,
https://graphics.reuters.com/CANADA-ECONOMY/TAXATION/xmpjolnjevr/
chart.png
That ratio, which includes all provincial and federal government debt, is set to
drop to 113% by 2022, based on projections for economic growth rather than debt
repayment.
Reducing Canada's debt as a share of the economy over time brings in some sort
of fiscal discipline, but that fiscal "anchor is destined to break during
challenging times," economists at BMO Capital Markets said in a post-election
note.
Trudeau's Liberals failed to score a majority in the Sept. 20 election and
continue to be dependent on the left-leaning New Democrats (NDP) to pass
legislation. That party could pressure the Liberals into more spending in
exchange for their support.
The Liberals have pledged to increase the corporate tax rate for big banks and
insurers, as well as introduce an extra payment by those same businesses to help
pay for the economic recovery. The government also plans to impose a minimum tax
rule for top earners.
Trudeau's Liberals will need support from at least one other party to pass any
new legislation, like changes to tax laws. The NDP favors tax increases on big
business and the very rich.
"We had a lot of fiscal space, a lot. And we used a lot of it on the pandemic,"
Dominique Lapointe, senior economist at Laurentian Bank, said, referring to the
government's record stimulus to support the economy.
"People are now worried because we used that fiscal space and we're still
continuing to introduce new measures."
![](http://archives.lincolndailynews.com/2021/Oct/18/images/ads/current/peasleymemorials_lda100213.png)
(Reporting by Julie Gordon in Ottawa and Fergal Smith in Toronto; Editing by
Denny Thomas and Jonathan Oatis)
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