Canada’s Trudeau Announces $10.5-Billion Fiscal Stimulus to Compete With US

The cabinet of Canadian Prime Minister Justin Trudeau is set to implement tax cuts for the nation’s businesses, which, along with the announced plans to reduce regulation, are highly reminiscent of the economic policies of Canada’s southern neighbour.

Kristian Rouz — Canadian Prime Minister Justin Trudeau has unveiled an ambitious plan to cut business taxes over the coming six years in order to maintain Canada’s international competitiveness in the face of a rapid private sector growth in the US.

Critics say the Liberal Party’s plan would deepen the federal budget deficit instead of cutting it — however, Trudeau’s options appear to be limited amid a threat of investment flight to just south of the border.

In a fiscal update this week, the Trudeau cabinet said Canada’s corporate taxes would go down as soon as this fiscal year. The tax cuts are set to be similar in fashion to US President Donald Trump’s tax relief provided to American businesses last December.
Finance Minister Bill Morneau said total worth of Canada’s fiscal package is estimated at $10.5 bln, with the upcoming changes allowing businesses to write-off capital expenditures more quickly.

This comes amid a nascent boom in capital investment in the US, which has become one of the main drivers of economic acceleration in America this year.

“This incentive will encourage more businesses to invest in assets that will help drive business growth over the long term,” Morneau said. “Because our economy is doing well, we also have the fiscal room to follow through on the commitments we made.”

For his part, Trudeau — wary of the criticism that Trump received from US Democratic party lawmakers — said he would also take a decisive step to increase the equity of pay and fair redistribution of wealth in Canada.

“Just last week, our government introduced historic federal pay-equity legislation.” Trudeau said. “Making important change is difficult, it takes courage to do great things.”

Some Democrats have labelled Trump’s tax cuts a ‘tax scam’, as they believe the US fiscal stimulus is disproportionately rewarding big enterprises as opposed to the working class. Trump administration officials have insisted the robust job-creation and wage raises — resulting from the tax cuts — have mainly benefitted America’s middle class.

And Trudeau appears to repeat the Trump administration success revitalising his country’ economy. Trump’s efforts have pushed US medium-term GDP growth projections to just above 3 percent per year — compared to roughly 1 percent just two years ago.
For its part, Canada’s economy grew 1.9 percent year-on-year in 2Q18, down from an impressive 3.8-percent growth just a year prior. This might be part of the motivation behind Trudeau’s decision to cut business taxes.

Meanwhile, Trudeau’s critics — mainly, from the Conservative Party — said the $10.5-billion tax cuts package would be insufficient to spur economic growth, while it would add to the federal deficits. Canada’s deficit for fiscal 2018-2019 was estimated at $13.67 bln in February’s budget, and this budget shortfall was expected to gradually increase over the coming four years.

This despite Canada’s GDP growth outpacing the gains in fiscal deficit. Conservatives alleged the Trudeau cabinet might be mishandling the fiscal matters as the nation continues to be mired in debt despite the quite favourable economic outlook.

Back in February, Canada’s total debt was expected to increase to $577.93 bln by fiscal 2023-24 from $519.76 bln in 2018-19. But Trudeau’s fiscal incentive is set to deepen the projected deficits.

The Trudeau cabinet also said the tax cuts would cost some 14.4 percent of GDP this fiscal year, and will boost the mining sector, business investment, and — quite likely — job creation as well.
Fiscal support for miners and drillers appears to be particularly urgent, as the booming oil production in the province of Alberta has faced a double challenge of lower oil prices (limiting investment and hindering profitability), and a rising competition from American drillers just across the border in North Dakota.

Additionally, Trudeau cabinet officials mentioned an upcoming effort to deregulate Canada’s economy — echoing Trump’s aggressive push to cut the red tape that, according to the US President, has kept US economic growth subdued for far too long.

The immediate effects of Trudeau’s fiscal package are expected to be part of his re-election bid next year.

Canada’s Conservative Party is likely to focus on what its officials describe as Trudeau’s irresponsible tax policies — saying in times of upbeat economic growth fiscal policies should be tighter.