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Please tax someone else: What economists expect in Budget 2017

  • What economists expect in budget
  • Morneau likely to wait for U.S. details
  • Global markets mixed, up in Europe
  • New York poised for stronger open
  • Loonie at about 74.5 cents U.S.

Donald Trump’s tax plans, uncertain though they may be, will be weighing on Finance Minister Bill Morneau’s mind as he heads toward his second budget.

Economists believe the Trump factor should play a role when Mr. Morneau unveils the document on March 22, given the question of competitiveness between Canada and the United States.

“A focus on addressing the perceived challenges to the middle class will likely dominate both the spending and the tax initiatives,” said Royal Bank of Canada chief economist Craig Wright.

“Although fluid, the policy environment in the U.S. should influence at least the tax considerations as it appears the U.S. is moving to an environment of lower personal taxes, a more competitive corporate tax rate and a lighter regulatory and environmental touch – all of which suggest the relative competitiveness of the Canadian economy vis-à-vis the U.S. will be significantly challenged in the period ahead.”

As The Globe and Mail’s Bill Curry reports, Mr. Morneau announced the budget date Tuesday, and is expected to include skills training in his plans, along with details of infrastructure spending.

Like Mr. Wright, other economists also cite what’s expected to happen in the United States, though it’s far from clear what shape that will take.

“Don’t expect there will be anything too significant given the infrastructure spending still in the pipeline from last year,” Bank of Montreal senior economist Benjamin Reitzes said of the Morneau budget.

“Otherwise, tough to say at this point, but efforts to improve Canadian competitiveness will be welcome (as ambiguous as that sounds), especially with the U.S. likely to be changing their tax structure to improve U.S. competitiveness.”

We could also see higher taxes on the wealthier among us, said Canadian Imperial Bank of Commerce chief economist Avery Shenfeld.

(Yes, I wish I were wealthier, but I’ll be selfishly happy if Mr. Morneau goes and taxes someone else. And, oh, to be a member of the beloved middle class, which Mr. Morneau cited four times in his five-paragraph budget news release Tuesday.)

“‘Fairness’ remains a theme for this government, so there will likely be measures that raise taxes on some upper income earners,” Mr. Shenfeld said.

“Our hope is that these are narrowly targeted. Now is not the time for hikes in broad taxes on investment or corporate income with our U.S. competitors about to benefit from moves in the other direction.”

As Mr. Curry reports, Mr. Morneau had planned to include the results of a review of tax credits, but that won’t happen now.

“The biggest question for us may be on the tax side, and to see what (if any) major changes there will be on the tax expenditure side,” said BMO chief economist Douglas Porter, adding he expects “a largely quiet affair” that sticks to the themes of Mr. Morneau’s first budget.

“There have been lots of rumours and speculation on that front, but that’s all it really is at this point – rumours and speculation. We do know that Ottawa is looking to raise up to $3-billion per year by closing some of these tax relief measures.

There’s also the ever-present issue of the federal deficit, and RBC’s Mr. Wright expects to see fat ones over the five-year forecast period.

“As the economy grows at a rate beyond its speed limit there is a decreasing need for expansionary fiscal policy, and the focus should be on returning to balance ahead of the next economic downturn,” Mr. Wright said.

“The risk to the deficit profile is likely to the upside as the government may re-introduce the adjustment for risk or contingency reserve that was removed in the fall,” he added.

“If the adjustment for risk is re-introduced it should be clear that if the risk adjustment is not needed, then the funds will be put towards debt reduction rather than used as a slush fund for additional spending.”