Here’s one thing Prime Minister Mark Carney now has in common with President Donald Trump: this week, both leaders heralded large, debt-financed tax cuts.
In Canada, Carney’s “middle-class” tax cut quietly took effect on July 1, lowering the lowest marginal personal income tax rate from 15 to 14 percent, at a cost of $28 billion over five years, according to the Parliamentary Budget Officer.
Three days later, on Independence Day, Trump signed into law his One Big Beautiful Bill, featuring $4.5 trillion USD in tax cuts over the next decade.
Borrowing to finance tax cuts isn’t exactly smart economics. In fact, it’s the kind of policy Carney the economist likely would have frowned upon. But Carney the politician had an election to win, and he made tax cuts his marquee budget measure. And for what it’s worth, the Conservatives were promising an even bigger tax cut—also debt-financed.
(As for Trump, it’s hard to imagine an economist alter ego.)
Politicians promising goodies during election campaigns is hardly surprising. But the numbers are starting to get big. In the U.S., the deficit could climb to around 7 percent of GDP because of the tax cut and new spending measures.
The fiscal picture in Canada is much more sane, though still ominous by Canadian standards. Carney’s tax cut is part of a broader, made-in-Canada expansionary agenda that the C.D. Howe Institute recently projected could push structural deficits to about $80 billion a year.
We are entering the era of fiscal wishful thinking. Governments are again testing how far they can push borrowing as a permanent feature of their agendas.
And the trend reflects two big factors. One, the lingering spending habits from the pandemic that have been tough to shake. Second, the pressure on governments to provide fiscal support in the face of both short-term weakness and long-term structural economic challenges.
Yet, the populist impulses of today’s politics mean lawmakers are reluctant to talk about trade-offs. Many politicians, in fact, are selling the opposite—that they can achieve three potentially conflicting objectives simultaneously: increase spending, keep taxes low and maintain debt levels under control. That’s a difficult fiscal trinity at the best of times. But improbable in the current period of weak economic growth.
Still, the public seems to be open to buying what the politicians are selling. In Canada, deficits never really came up as an issue in this year’s election campaign.
Markets, too, are still giving governments the benefit of some doubt, but signs of caution are emerging.
