Budget Challenges: Finance Ministers Aim to Tackle Affordability

Quebec Finance Minister Eric Girard reads his budget speech in the Quebec legislature in Quebec City on March 21, 2023. The Canadian Press/Jacques Boissinot

March is budget month for Ottawa and many provinces, presenting challenges for finance ministers to ease the pressures inflation has wrought for Canadians in ways that won’t make the problem worse.

In its March 21 budget , Quebec reduced the lowest two tax rates by 1 percent starting this year, potentially saving each Quebecer up to $814 as of 2023 at a cost of $9.2 billion to the government over six years.

Revenues are expected to grow 1.8 percent over the last fiscal year to $147.7 billion in 2023–24, while expenditures will grow by 0.7 percent to $147.9 billion. In 2023–24, the deficit will be $1.6 billion after a contingency reserve is accounted for, and rises to $4 billion after accounting for legally required payments into a fund dedicated to paying down debt.

The B.C. government since summer 2022 has delivered temporary cost-of-living supports. Some were made permanent in the 2023–24 budget delivered Feb. 28, such as $1.3 billion over three years in new supports for students, foster families, and those on income and disability assistance; and free prescription contraception. An additional $3.2 billion was offered for new and enhanced tax credits including increases to the Climate Action Tax Credit and BC Family Benefit, and for the new income-tested Renter’s Tax Credit.

However, the province will run a $4.2 billion deficit in core spending this fiscal year, weighed by $15.84 billion in total capital spending.

Lakehead University economics professor Livio DiMatteo prefers Quebec’s approach.

“Lowering income taxes is one way of making life more affordable, as it is less inflationary than simply injecting more government spending into the economy. While it increases disposable income, it can also boost work effort, which boosts the supply side of the economy,” DiMatteo told The Epoch Times.

Alberta’s budget 2023, released Feb. 28, estimates $66.8 billion in total expenses, up from the $64.3 billion forecasted for last year. Last year’s projected $10.4 billion surplus drops to $2.4 billion in 2023–24. However, the government committed to maintaining balanced budgets and tying increased operating expenses to population growth and inflation. In future, at least 50 percent of any surplus funds must go toward debt repayment.

University of Calgary economics professor Trevor Tombe says lower taxes are a superior approach to rebate cheques, such as the $600 per child Albertans had to apply for and the $500 eligible Saskatchewan residents received earlier this year.

Tombe says Ontario’s reductions to fuel tax rates and Alberta’s six-month suspension of fuel tax collection are better tools for widespread relief with minimal government administration, although the political impact may also be less.

“The administrative costs of temporarily changing the tax rate is pretty low relative to setting up a system to distribute cheques. So, for example, in Alberta, this rebate that everyone’s getting, they had to set up a whole system to have people apply and receive the money, whereas the gas tax change is just a regulatory change,” Tombe said.

“The politics are very different because one is more visible than another.”

Ontario will table its budget on March 23.

Targeted Measures

In Quebec, citizens over 65 who are in the workforce will be given the option to stop paying into the Quebec pension plan, a move that will increase their after-tax income.

Tombe said targeted measures in this time of higher inflation are best directed at families with children, not seniors. He said the federal government has good options to address this in the March 28 budget.

“Families with kids spend more on food and fuel as a fraction of their budget than families without kids for the same level of income. Those are the products driving inflation, so these are families under particular strain,” Tombe said.

“If the feds have some temporary boost to the child benefits, that could be something that they could justify, I think fairly easily.”

Another option is to renew the increase in the GST rebate. Last November the feds provided a one-time payment that effectively doubled the rebate for six months.

“When prices go up, GST revenues go up. [With rebates] they’re taking some of the extra windfall dollars that they’re collecting from inflation, and then sending that back out to these targeted individuals. It’s not inflationary in the way as borrowing new money and spending it,” Tombe said.

In a recent Angus Reid poll, almost half (47 percent) of Canadians said they are “worse off financially than they were at this time last year after a year of inflation not seen since the 1980s.” Only one-in-five (22 percent) expect their fortunes to improve in the next 12 months.

Any additional measures to address affordability will likely be welcomed, said the findings. Three-in-five (59 percent) Canadians believe cost of living to be a top issue. The proportion who selected inflation as a top issue is much higher, 69 percent, among those giving poor assessments of their finances and are pessimistic about their future. That group is also more likely to worry about taxes (23 percent) and the deficit (20 percent) than those who offered neutral or better financial assessments.

Nelson Wiseman, emeritus professor of political science at the University of Toronto, says the helpful politics of addressing affordability must be balanced against economic realities.

“If affordability measures are introduced they ought to be targeted by means testing. Some people have affordability issues no matter what the economic environment,” Wiseman said.

“Increased government spending, as occurred massively during the pandemic, can feed inflation, but many of the causes of higher prices are beyond government’s control. They include supply chain issues, war in Ukraine, climate change, and tight labour markets.”

Fighting Inflation

Tom Flanagan, emeritus political science professor at the University of Calgary, says provinces don’t need to be as cautious about triggering inflation.

“Provincial governments don’t control the money supply, so their spending can’t be inflationary. Provinces can run up debt, but they can’t increase the supply of money,” Flanagan told The Epoch Times.

“Increases in federal spending are not automatically inflationary; it depends on how they are funded. If they are funded by increases in taxation, they would not be inflationary—also not if deficit financing is backed by borrowing of real dollars, not money created by the Bank of Canada.”

Federal Finance Minister Chrystia Freeland has signalled that she intends “a narrowly focused and fiscally responsible” approach, with some economists saying high federal spending could undo efforts by the Bank of Canada to fight inflation.

Christopher Sarlo, an emeritus professor of economics at Nipissing University, says that high spending during the pandemic did trigger some of the current problems and that a smarter approach going forward can avoid such pitfalls.

“Inflation seems to be pretty ‘sticky’ and continues to be damaging. Inflation especially hurts working-class families with below-average incomes and people living on fixed incomes. It is a scourge that for a long time we had under control with inflation at or below 2 percent,” Sarlo told The Epoch Times.

“Long story short, the high inflation rate that we have now is a government-made problem. It would be better, in my view, if they did not try to fine-tune the economy in response to various shocks but rather kept monetary and fiscal policy on a steady, stable course.”

The latest stats suggest inflation is already easing. The Consumer Price Index (CPI) rose 5.2 percent year over year in February, following a 5.9 percent increase in January. This was the largest deceleration in the headline CPI since April 2020.

The year-over-year increase in food prices remains high, with increases 14.8 percent for cereal products and 15.7 percent for fruit juices among the highest categories.