Don't fear big deficits, says think-tank that created alternative budget

The Canadian Centre for Policy Alternatives has urged Prime Minister Justin Trudeau allow the deficit to rise to $37.9 billion in 2016-17, but also take steps to get money into the hands of Canada's poorest people to stimulate growth.

The progressive think-tank introduced its Alternative Federal Budget on Thursday, saying the Canada shouldn't let federal deficits "scare us off making much needed investments in Canada."

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Finance Minister Bill Morneau projected a 2016-17 deficit of $18-20 billion in a February update, but that was before the federal government made its promised investments in infrastructure spending.

As the oil sector pulls back, Canada's economy has slowed, leaving some economists to urge Morneau to allow deficit spending to rise in the March 22 budget.

The previous federal government reduced its deficit by cutting program spending for the past 10 years, shifting the burden of spending to the provinces, who have never had such high levels of debt, says CCPA senior economist David Macdonald.

"We likely need a bigger federal deficit in order to better balance the books in the provincial sector," he told CBC News. "They've been carrying the burden of economic growth over the past few years."

He says the alternative budget the CCPA has put forward could result in the creation of about 520,000 jobs and stimulate economic growth, resulting in Canada's debt-to-GDP ratio falling, despite a larger deficit.

Jobs in construction, not oil

The jobs would be created by removing subsidies for fossil fuels and mining and investing instead in infrastructure, especially infrastructure that advances the shift away from oil, such as transit. Macdonald argued that capital spending is not returning soon to the oilpatch, so it makes sense to create construction jobs elsewhere.

It also would be an effective strategy to reduce inequity, he said. There is a  "multiplier effect" of getting more money into the hands of low and middle-income Canadians, who are more likely to spend it, Macdonald said.

We need to restore fairness and progressivity to our tax system by closing unfair and ineffective tax loopholes and aggressively fighting tax evasion- CCPA Alternative Federal Budget

The Montreal Economic Institute took issue with the CCPA's premise that increasing budget deficits could boost the economy.

"In the aftermath of the 2008 financial crisis, it is the OECD countries that reduced both their public spending and their revenues that succeeded in achieving the fastest average annual growth," said Mathieu Bédard, economist at the MEI, a free market think-tank.

"Conversely, countries that chose to increase both their spending and their tax burdens experienced very slow growth, and even economic contraction if Greece is included in the calculation," he added.

Increasing public spending reduces private spending, he argued.

Macdonald said the Liberal election platform already includes ideas from past alternative budgets produced by the CCPA, including eliminating family income splitting and reducing TFSA room.

He also urges free tuition for post-secondary school and the creation of affordable child-care, ideas also floated by the Liberals.

But he said the federal government should focus on who benefits from program spending as well as from tax credits, as too often it is the upper income groups who benefit most.

"We've never seen this type of analysis in a federal budget. We think it's something that should be included," he said.

Reform the tax system

The CCPA argues for a simplification of  Canada's tax system, saying it has become so regressive that the top 1 per cent of earners pay a lower share of income in tax than the poorest 10 per cent.

"We need to restore fairness and progressivity to our tax system by closing unfair and ineffective tax loopholes and aggressively fighting tax evasion using tax havens, while at the same time raising tax rates on upper incomes," the CCPA said in its budget report.

It put forward a plan it said would reduce income inequality, but demand about 2.6 per cent more taxes from the top five per cent of income earners.  

It argues for greater simplicity in the tax system, saying it has become riddled with expensive loopholes:

Among the loopholes it recommends eliminating:

• The stock option deduction.
• Capital gains deductions.
• A limit on RRSP contributions of $20,000 annually.
• Pension income splitting.
• Boutique tax credits.
• A $1 million limit on deductions for companies for executive compensation.
• Corporate meal and entertainment deductions.
• Fossil fuel and mining subsidies.

The CCPA recommends increasing corporate income taxes to 21 per cent, from 15 per cent today, pointing out that as taxes have been reduced, businesses have made higher profits, but investment declined.

Transaction tax, carbon tax

It also would introduce inheritance tax and a financial transactions tax on exchanges of stocks, bonds and foreign exchange transactions, which it estimates would bring in revenues of $5 billion a year.

"This would be a substitute for the GST, which the financial sector is exempt from paying," Macdonald said.

It says Trudeau should reverse cuts to the Canada Revenue Agency by the previous government, putting resources toward tackling tax havens and tax cheats.

The CCPA supports a carbon tax, created in partnership with the provinces, of $30 per tonne of CO2, but says poor households should get a "green" tax refund.