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Dropping the fiscal anchor, beefing up supply chain security, and other budget ideas for Chrystia Freeland

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As Finance Minister Chrystia Freeland prepares to unveil the federal budget today, Canadians can expect a document that is constrained by the country’s rising prices and the interest rate hikes intended to battle them.

The Liberal government has already let it slip that the budget contains “grocery rebates,” in the form of a boosted GST rebate and, in public comments, Freeland has admitted that other spending will be constrained by the current fiscal reality.

Here are a few ideas and concerns shared by think tanks and interest groups, and with varying levels of viability, for Freeland.

What’s the fiscal anchor?

One consistent feature of budgets since Prime Minister Justin Trudeau came to power in 2015 is the government’s shifting fiscal anchor.

Originally, Trudeau planned to balance the budget after running a series of deficits immediately after taking office. That plan shifted to a fiscal anchor based on shrinking the debt-to-GDP ratio over time.

The Parliamentary Budget Office expects a short-term spike in debt-to-GDP due to increases in the deficit and a slowdown in growth.

“By continually abandoning or violating its own chosen fiscal anchor, the federal government would ensure the metric becomes meaningless,” wrote Jake Fuss, the associate director of fiscal studies for the Fraser Institute.

“If the stakes holding down the tent are fragile or removed completely, the tent only needs a gust of wind to bring impending disaster,” wrote Fuss.

Beefing up Canada’s security

The Business Council of Canada urged Freeland to get serious about reining in spending, pointing out that last year’s “strategic policy review” planned to save $6 billion over five years or “a rounding error.”

“When interest rates go up faster than growth, there is no easy way out: debt financing becomes much more burdensome for taxpayers,” the council wrote.

The council also urged Freeland to pour more resources into Canada’s intelligence and security organizations to shield the private sector from state and non-state adversaries that are “constantly seeking to disrupt vital supply chains, steal intellectual property, and compromise critical infrastructure.”

“Canada cannot be the weak link in the economic security chain with our trading partners and allies,” the council wrote.

Helping Canadians save for retirement

With Canadians increasingly concerned about their financial future, the C.D. Howe Institute unveiled several recommendations designed to help workers save for retirement.

The think tank recommends increasing the amount that Canadians can contribute to their RRSPs, from 18 percent to 30 percent of income. The report also recommends boosting the age at which Canadians must stop contributing to, and start drawing down, tax-deferred savings.

Many of these policies date back to the early ’90s and don’t take into account the longer lives and careers of Canadians in 2023, the report argues.

The C.D. Howe Institute shadow budget has a number of other bold recommendations, including raising the GST two percentage points over the next two years, phasing out the tax credit for first-time homebuyers, and recalibrating immigration to emphasize skilled workers.

The Business Council of Canada made a similar recommendation on immigration, arguing that 65 percent of new permanent residents should be economic immigrants and their family members next year, rather than the current rate of 58 percent.

The think tank also recommends a corporate tax cut to keep up with recent moves by the United States.

“These lower U.S. rates not only encourage businesses to locate more of their profit generating activity in the U.S., but also provide an incentive to allocate more profit to the U.S. and less to Canada,” the shadow budget reads.

An unlikely pay freeze

There are no betting odds on the 2023 federal budget but, if there were, the longest odds might be on a Canadian Taxpayers Federation recommendation to free MP pay.

Citing a three-year pay freeze starting in 2010 in the wake of the Great Recession, the CTF argued that the current fiscal climate called for a similar gesture.

“MPs don’t need another raise from their constituents who are struggling to fill the fridge,” said Franco Terrazzano, the federal director of the Canadian Taxpayers Federation, at a news conference in Ottawa on Monday.

‘It is not only about economics’: Biden’s friendly visit doesn’t change the protectionist status quo

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A lot can change in seven years. Joe Biden’s sleepover in Ottawa last week was the first state visit by a sitting U.S. president since June 2016, when Prime Minister Justin Trudeau hosted Barack Obama during the first year of his premiership.

Just a few months after Obama’s visit, Donald Trump won the 2016 U.S. election. Trump’s protectionist policies, including tariffs and ending America’s involvement in international trade treaties, upended a decades-long consensus on international free trade. 

Many Canadians breathed a sigh of relief when Trump failed to win re-election in 2020, and was replaced by Biden. On matters of international trade, however, Canada and the U.S. have not returned to the status quo of 2016.

Trevor Tombe, a professor of economics at the University of Calgary and Hub contributor, says that since Trump became president, the U.S. has been less willing to engage with international institutions and trade, both courses of action that are popular with the U.S. public. A Gallup poll earlier this month suggested a record-low 65 percent of Americans want the U.S. holding a leading or major role in world affairs.

“It’s potentially not a partisan issue or a personality-driven issue, but something that’s an important component of U.S. public sentiment, in terms of how they view their place in the world, or the relative merits of international trade agreements,” says Tombe. “I wouldn’t put any kind of disproportionate burden on Biden’s shoulders in terms of changing the economic relationship between Canada and the U.S., not at all.”

Biden has not undone the protectionism that began in the Trump era. With a pandemic in early 2020, and then Russia’s invasion of Ukraine two years later, the global economy was further rocked by severely disrupted supply chains and a world re-polarized between democracies and authoritarian regimes like Russia and China. 

Biden also killed the Keystone XL pipeline and introduced hundreds of billions in tax credits and subsidies on green projects to achieve “Net Zero” carbon emissions. 

Canada itself has engaged in its own form of incentivizing green projects, with the federal and Ontario provincial governments spending a yet-undisclosed amount of money this year to ensure Volkswagen builds its electric vehicle battery plant in St. Thomas, Ontario. Estimates of the total cost range as high as $10 billion CAD, and the project has been received with a mixture of praise and skepticism surrounding the cost and benefits of the plant. 

Candice Chow, a professor at McMaster University’s DeGroote School of Business, says the electric vehicle industry would have been an important topic during Biden’s visit. 

“As the U.S. is seeking to bring jobs back, Canada needs to ensure with its vast natural resources, we do not become a country of commodity export, but secure our ability to take a leadership position in innovation and in green technology,” says Chow. 

With the electric vehicle industry growing and requiring new spaces and capabilities, Chow says it’s natural to reshore the industry within Canada. 

“Canada has the competitive advantage in mining for cobalt and has lithium deposits, completing a crucial aspect of (the) EV auto supply chain,” says Chow. “Our weather creates opportunities for us to build and develop better battery range. We have a healthy auto sector cluster with part suppliers, especially in Ontario, and multiple multinational enterprise auto brands already have facilities in various parts of the province (and) country.” 

Chow says there are many reasons why certain industries are reshoring, including economic and political ones. 

“We in general have allowed ourselves to become very heavily dependent on inexpensive Chinese manufactured goods,” says Aurel Braun, a professor of international relations and political science at the University of Toronto. “Now that we are seeing the conflict in Ukraine, now that we have seen the aggressiveness of China in the South China Sea, we will begin to realize that it is not only about economics, that politics are always a factor.” 

Braun says that whether or not reshoring and the related trend of friendshoring (the reorienting of trade within democratic countries instead of dictatorships) are here to stay or are merely an interlude depends on what lessons are learned. 

“This notion of free trade was not one that we really understood well, and we have been paying a very high cost for it,” says Braun. “We are finding that the Chinese would supply cheap goods, but then we became very dependent on them, and they will conduct industrial espionage and political interference.”