Ottawa can expect a revenue windfall, but spending will determine the deficit
Budget 2023: Big tax increases not likely to be on the table
If the provinces are any indication, Ottawa may report a surge in tax revenue when it unveils its 2023 budget March 28, but whether it’s enough to put a dent in the deficit will depend on the government’s spending plans.
Most provinces tabling their budgets over the past few weeks enjoyed tax windfalls from the 2021 assessment season as taxable income grew. The federal government is expected to see a similar revenue bump from pandemic support repayments, higher taxable income and other tax revenues such as the one-time excess profit tax on financial institutions.
“There is going to be a revenue windfall, there’s no question there,” said Randall Bartlett, senior director of Canadian Economics for Desjardins.
“Additionally, they have already announced spending, that is going to be something which is going to take place in the current fiscal year and be booked in the current fiscal year. So, there are going to be some off-setting spending measures in there as well.”
Just how far the government goes in terms of spending will determine what kind of deficit is projected for 2023-2024. As for the current year, Ottawa’s Fall Economic Statement, released in early November, pegged the 2022-2023 deficit at $36.4 billion but the Desjardins economics team is now expecting a $41-billion deficit that will grow larger over the next two fiscal years before easing in the years after.
The Parliamentary Budget Officer expects the deficit to slip to $36.5 billion in fiscal 2022-2023, but will temporarily rise the following year to $43.1 billion. Assuming there’s no new spending, the deficit should decline after that.
Banking on a tax windfall wouldn’t be a sustainable approach as taxable corporate profits weaken and an anticipated economic slowdown is expected to weigh on consumption and the labour market, curbing growth in taxable income.
“We think that really the best time for federal revenues is probably going to be behind us and, going forward, I think they’re going to be a lot more challenged in terms of the outlook for revenues,” Bartlett said, adding that high inflation is starting to be incorporated into the budget’s spending profile through measures such as public servant wage increases and benefits for seniors.
Bartlett added that while there was a boost on the revenue side from inflation early on, that tailwind will fade and the expenditure headwind will be felt more strongly this year heading into next year.
Leading up to Budget 2023, there has been speculation of tax increases to help offset the costs of new spending, but the Desjardins team said few details had been shared.
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Avery Shenfeld, managing director and chief economist of CIBC Capital Markets, downplayed the potential for a politically unpopular tax increase, especially to the GST.
“Speculation about an increase in the GST, following recommendations to do so from some policy experts, seems likely to be way off the mark,” said Shenfeld in a March 24 note. “A GST hike a year ahead of a potential election just isn’t in the cards given its political peril, and the same would be true for any broad-based increase in taxes. Deficits won’t be large enough to make the case for a big revenue grab at this point.”
Shenfeld added that these concerns are raised every year and if there are any changes in tax policy, the Liberal government’s playbook would more likely target upper-income earners than raising the GST.
• Email: [email protected] | Twitter: StephHughes95
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