Not fair for the next generation to pay our lockdown-induced debt: C.D. Howe report
The C.D. Howe Institute is outlining its wishlist for the upcoming federal budget, calling on the Liberal government to keep a close eye on ballooning debt levels and to institute a slate of policy changes to help the domestic economy navigate a post-pandemic world when Deputy Prime Minister and Finance Minister Chrystia Freeland tables the first federal budget in two years on April 19.
In a report released Wednesday, the right-leaning think tank warned that Canada risks facing a “wrenching adjustment” if the feds fail to get the key debt-to-GDP ratio under control after a year of unprecedented peace-time spending aimed at combating the worst ravages of the pandemic. The institute also outlined a series of policy recommendations it would like to see implemented to help bolster financial sustainability.
RAISE GST TO PRE-HARPER LEVELS
The institute is calling on Ottawa to reverse the GST cuts implemented by former Prime Minister Stephen Harper, where the Conservative government reduced the consumption tax by two percentage points over two years, starting in 2006. In the report, the think tank argued that consumption tax hikes would be the least distortive on overall economic growth, and called for the feds to increase the tax to seven per cent from the current five per cent in 2023. The institute estimates that measure would boost government revenue by $19.6 billion in fiscal 2023-24.
LOWER THE CORPORATE TAX RATE (AGAIN)
The race to the bottom in corporate tax rates has largely gone dormant over the past handful of years after a spate of cuts, but the think tank argued it’s high time for Canada to reduce this country’s rate to 13 per cent from 15 per cent, starting in 2024. The authors of the report said Canada has lost some of its competitive edge after the U.S. slashed its corporate tax rate to 21 per cent in 2018 and implemented accelerated depreciation measures that made it more attractive for companies to invest in new equipment.
However, any further reduction in the corporate tax rate could draw the ire of the United States, as the Biden administration has floated the idea of a coordinated corporate tax floor among developed nations to discourage a race to the bottom.
Canada last cut corporate taxes in 2011, reducing the rate from 18.5 per cent. C.D. Howe estimates the tax cut would reduce government revenues by $3.9 billion in 2024-25.
TAX THE FOREIGN TECH TITANS
Among the least contentious recommendations made in the report, the think tank is calling on Ottawa to “level the playing field” by forcing tech titans like Netflix Inc. to collect and remit taxes for goods and services delivered on Canadian soil. At present, those companies are not required by law to collect taxes from consumers, but Ottawa outlined a plan to implement such a measure in its fall fiscal update, to take effect in July. C.D. Howe estimates the move would generate about $200 million in annual revenue for the feds.
PHASE OUT THE FIRST-TIME HOMEBUYER TAX CREDIT
The think tank argued it would be appropriate to phase out the first-time homebuyer tax credit, which has been available to eligible homebuyers since 2009. The program offers a $5,000 non-refundable tax credit to Canadians buying a home of their own for the first time, resulting in about $750 of federal tax relief. The institute said Ottawa should focus on eliminating any measures that could increase housing demand during a period of red-hot home price appreciation, even at the margins. The institute estimates eliminating the credit would boost revenue by $100 million a year.
SHELVE MOST OF THE EXTRA STIMULUS
The authors of the report left about two-thirds of the additional $70 billion to $100 billion of planned stimulus over the next three years unspent in their shadow budget, stating further stimulus of that degree is not necessary. The think tank argued against implementing new long-term spending measures like a national pharmacare program, a guaranteed basic income or an enhancement to Old Age security, that would structurally increase annual government expenditures.