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On Election Day, Canada’s Economic Future Hangs in the Balance

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On Election Day, Canada’s Economic Future Hangs in the Balance

October 21, 2019

Canadians head to the polls today, with incumbent Prime Minister Justin Trudeau’s ruling Liberal Party running neck-and-neck with Andrew Scheer’s opposition Conservative Party. Healthcare, education, taxes, and climate change have topped the list of voters’ concerns in an uncharacteristically nasty race.

Until recently, such an even race remained unthinkable. But Trudeau’s “blackface” scandal and more recent allegations of ethics violations, recently confirmed by independent ethics commissioners, have damaged him at the polls.

The ethics violations involved Trudeau pressuring his former justice minister and attorney general to drop criminal charges against SNC-Lavalin, a Montreal-based company with deep financial and political ties to the Liberal Party. While initially denying any knowledge or involvement, Trudeau now defends such actions as trying to “protect Canadian jobs.”

Trudeau’s stated justification is telling. What’s most at stake in today’s election is the direction of Canada’s economy, in particular the amount of government spending and taxation. 

Government spending in Canada has risen fairly significantly under Trudeau to 20.8% of GDP in 2018 from 20.3% in 2014. This is largely driven by increases in program spending, which have gone up by 25 percent over four years, reaching $323.5 billion for the Canadian fiscal year ending March 2019. At the same time, Trudeau has raised taxes tremendously on high income earners as well as the middle-class

Meanwhile, economic growth has been slow. In the three full years Trudeau has been prime minister, Canada’s GDP growth has been just below 2%.

The Conservatives offer a pro-growth economic policy vision that promises a “universal tax cut” that would lower the tax rate for the lowest income bracket (which ranges from 0 to 47,630 Canadian dollars) from 15% to 13.75%.

This would effectively deliver a tax cut to every Canadian taxpayer and promote economic growth by putting more money in the pockets of Canadian consumers. Conservatives estimate the average individual taxpayer would bring home approximately $444 more of their earned income per year.

Scheer’s Conservatives have also promised to scrap the Liberals’ recently implemented federal carbon tax, which Scheer says “hurts the bottom line of Canadian families, but also does not get us closer to Canada’s emissions reduction targets.”

All of this is a welcome return to across-the-board, pro-growth tax policies for the Conservative Party. Former Prime Minister Stephen Harper’s re-election bid fell short in 2015 in part due to the Conservatives making an expanded “family tax cut” child tax-credit scheme the focus of their campaign. Such child tax credits do little to spur economic growth and are often political giveaways targeting conservative-leaning upper-middle class families (which arguably could be effective at winning votes but not enlivening the economy).

Meanwhile, the Liberals have continued their tax-and-spend ways. After taking office in 2015, Trudeau sharply raised taxes not just on the wealthy but also on the middle-class. Trudeau raised the marginal income tax rate for those making more than 200,000 Canadian dollars (U.S. $152,000).

As a result, the top marginal tax rate for a taxpayer living in Ontario making 220,000 Canadian dollars (U.S. $167,200) is 53.53%. That means that many Canadians living in high-tax provinces like Ontario owe the provincial and federal government collectively more than half of the marginal dollar they earn.

As is often the case, higher taxes didn’t result in more money in federal coffers. Canadian federal tax revenue actually fell by $4.6 billion in 2016 in the first year the Trudeau tax hikes took effect, despite promises they would raise more revenue.

In 2015, Trudeau also promised Canadians a balanced budget, famously saying “the budget will balance itself.” As of 2019, that remains to be seen as the Trudeau government continues to run perennial deficits while rapidly increasing government spending. In fact, the Trudeau 2019 campaign plan is proposing an additional $9.3 billion in government spending, which would increase the Canadian federal deficit to $27.4 billion in 2021.

In an attempt to appease its green constituents, the Trudeau government has also thrown up energy-industry roadblocks, including the delay of pipelines of national importance. Approving new job-creating, export delivering pipelines is something Scheer and his Conservatives have championed. Trudeau did, in June, approve the expansion of the 620-mile Trans Mountain Pipeline, which would bring petroleum from oil sands near Edmonton, Alberta, to Vancouver on Canada’s Pacific Coast.

While that was a helpful step, the larger trend is clear: a combination of onerous regulations (particularly in the energy sector), expanded government programs, and higher middle-class tax rates have all contributed to inhibiting growth.

As Winston Churchill said, “For a nation to tax itself into prosperity is like a man standing in a bucket and trying to life himself up by the handle.” That is exactly the approach Trudeau has been taking — one that would be reversed by Canada’s conservatives.

Jon Hartley is a Master's in Public Policy candidate at the Harvard Kennedy School.

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Photos by Cole Burston/Getty Images

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