Theo Argitis: How likely is a tax hike this fall?

Taxation Three points on the tax issue. One, changes to tax levels tend to be a lot more permanent than changes to spending. Tax decisions tend to be sticky, in other words, which is why the political bar for big moves is typically high. Second, tax levels have already crept up. Federal tax revenue is up by more than two percentage points of GDP over the past decade—totalling roughly $60 billion a year—though from historically low levels under Stephen Harper. As a share of GDP, federal tax revenue has returned to about its post-Second World War average, but is still at its highest in two decades. Any further tax hikes, in other words, would be coming from a much higher base than it did under the Trudeau era. Third, the federal government is also taking a bigger slice of Canada’s total tax pie. Its share of consolidated government revenue—which includes provincial, local, and CPP income—is now about 38 cents of every tax dollar, the highest since 2007. The federal government risks crowding everyone else out. Spending When it comes to spending, levels matter, and right now, expenditures are already historically elevated. Program spending is running at roughly 16 percent of GDP, above the post-war average of closer to 15 percent. Excluding recession years, the historical average is nearer to 14.5 percent. Carney’s new defence commitments and campaign promises could add at least another percentage point of GDP in spending structurally—between $30 billion and $40 billion per year—pushing expenditures toward historic highs. Add public debt charges, which are approaching 2 percent of GDP, and total federal spending would be near 19 percent of GDP, without being offset by cuts elsewhere. That level of spending is hard to reconcile with manageable deficits, no matter how much you tax. Historically, when federal spending has exceeded 18 percent of GDP, Ottawa has never held the deficit below 1 percent of GDP. In fact, since the Second World War, deficits have averaged 4.3 percent of GDP in years when spending has crossed that threshold. This is an intuitive outcome. There are more constraints to raising revenue than there are to increasing spending. Deficits Debt also matters, of course. And Canada’s fiscal picture is worse than the heralded net debt figure that is widely used as a benchmark by the government. When using gross debt measures—which give a more accurate picture of the fundamental constraints faced by fiscal planners—international comparisons are less favourable. On the flip side, borrowing provides more flexibility than tax increases, which, as I noted, tend to be more permanent. Meanwhile, there is also a case that Canadian debt may become more attractive in a world where global savings are fleeing the U.S. There may be more scope than we think to increase debt without incurring the wrath of investors. Though, of course, there are limits here. Perhaps the best way of looking at the issue is less one of choosing between the three bads, and more a question of sequencing. First, spending needs to come down before the federal government layers more on top. Levels can only go so high before undermining the whole fiscal framework. Then, attention can turn to the merits—or not—of higher structural deficits to support productivity-enhancing investments. This is a debate we will have very soon. And only then, once spending has been brought under control and we’ve thought through the merits of investment-driven deficits, should tax begin to be part of the conversation. As for political windows, who knows, an election in two years’ time may give Carney an even better opening to test the possibilities of tax hikes, should he wish. And even then, it would need to be part of a broader tax reform for it to have much of a chance of survival.