Federal Budget 2017: Will Taxes Go Up?

The Federal Budget is expected to be released in this fiscal quarter. Will taxes go up over the next five years? Finance Canada’s Fall Economic Update, released on November 1, 2016, provided an extensive analysis of near-term trends and private sector forecasts to give professional advisors good direction on the likelihood of tax increases in the period, and how inflation, interest rates, the dollar and the price of oil are expected to perform.

Amongst the important observations in the report:

Global economic growth will continue to grind along a “sustained lower growth track,” as it works its way through what’s being called a fundamental structural shift. Growth rates in the G7 countries is expected to average 1.4% over the next five years and Canada is expected to be amongst the fastest growing economies, according to this report. The middle-class tax cut, the new Canada Child Benefit and new investments in infrastructure are contributing to this growth.
 

Economic Risk: The economic risks to be managed throughout the globe are the following:

• since 2014, low commodity prices have affected resource-based economies, including Canada’s
• the economy in China is also changing towards consumption-based growth and away from investment and trade-intensive growth
• new risks stemming from political change in Europe due to migration and Brexit, and in North America as a result of the U.S. election, all of which bring uncertainty to growth projections
• higher levels of public and private debt stemming from the financial crisis of 2008-09
• aging populations within advanced economies, which are resulting in lower workforce growth

Bonds and equities: The report states that the OECD (Organization for Economic Co-operation and Development) estimates over 35% of OECD-wide government debt is trading at negative yields. As a result, the average real 10-year government bond rate in major advanced economies is now negative, while equity markets have realized all-time highs.
 

U.S. growth rates continue to affect us in Canada. The report notes that the U.S. has been in one of the longest periods of economic expansion since the Great Depression. As expected, in response to this, the Federal Reserve raised interest rates in December. But according to the update, the U.S. appears to have “limited capacity” to continue a consistent growth trajectory, as it, too, suffers from an aging population and low productivity growth. The wild card is the effect of a dramatically different approach from a new presidential administration and its potential effects on these paradigm shifts.
 

Global GDP Growth: For now, the IMF projects that real GDP growth in G7 countries will average 1.4% per year over the next five years.
 

Commodity-based Economies: Despite declines in commodity prices, in particular crude oil, Canada is expected to be among the fastest growing economies, at least partially because of recent new tax changes: the introduction of the middle-class tax cut from 22% to 20.5%, the introduction of the Canada Child Benefit and investment in infrastructure.

So how do all of these economic developments affect taxation going forward?

Finance Canada’s Fall Economic Update made an important observation to tie it all together for Canadian taxpayers:

“. . . the level of nominal GDP—which represents the sum of all incomes economy-wide—is now $87 billion lower (than at the 2015 Budget projections), representing . . . a cumulative loss of $112 billion in national income over the last two years, or $6,200 for every working Canadian.”

When there is a loss in national income, there is a loss of tax revenues for indebted governments. Indeed, income tax revenues, the government’s largest budgetary income line item, are expected to decline in every year of the five-year period starting in 2016-17 and ending in 2020-21.

Where to look for new funds to meet government priorities? It may make sense for finance ministers to find ways to tax accumulated wealth in capital assets. Capital gains inclusion rates, limits in loss carry forwards or new taxes on tax-preferred or tax-exempt sources could result.

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