On 19 October 2015, Canada witnessed one of the largest reversals in political fortunes in recent electoral history when the Liberal Party, led by a youthful Justin Trudeau, bounced back from a dismal performance in the 2011 election to end the Prime Minister Stephen Harper's decade-long stint in power in emphatic fashion.
Was This A Vote For Change?
On the face of it, yes. Harper’s Conservative party won just 99 out of 338 seats in the House of Commons in 2015, compared with 166 out of 308 seats in 2011. The Liberals won 184 seats this time, but just 34 in 2011. So the magnitude of the swing away from the Conservatives and their conservative fiscal policies suggests that Canadians want something different from their Government. And with Canada stagnating economically, Trudeau’s more expansionary policies were probably more appealing to voters than the status quo under Harper.
In practice, this will mean that the Canadian Government will spend more money on growth-orientated projects such as infrastructure improvements, and in order to do this, the Liberals intend to run a “modest” budget deficit of about CAD10bn before balancing the books in 2019. This marks something of a departure from the former Canadian Government, which considered a fiscal surplus a cornerstone of responsible economic management.
Tax – Saving The Middle Class
Middle class swing voters were courted heavily by the Liberals during the election campaign, and the Party’s fiscal plan makes liberal use of the term “middle class” throughout. Indeed, the plan itself is entitled “Growth for the Middle Class” and its introductory text begins: “When you have an economy that works for the middle class, you have a country that works for everyone.”
Not that the Liberals are promising anything radical in the area of tax, with a minor tax cut in store for those on middle incomes, and a modest tax rise expected for those earning more than CAD200,000 per year.
Under the current system, tax is paid at 15% on the first CAD44,700 of taxable income, 22% on the portion between CAD44,701 and CAD89,401, and 26% on the portion between CAD89,401 and CAD138,586. Income over CAD138,586 is taxed at 29%. The Liberal Canadian Government plans to reduce the tax rate on incomes between CAD44,700 and CAD89,401 from 22 to 20.5%. It would also introduce a new tax bracket for incomes over CAD200,000, with a rate of 33%.
Curbing Tax Breaks for the Wealthy
The Liberal fiscal plan also seeks to raise revenue from a review of tax expenditures, with a view to axing tax breaks that affect the top 1% percent of taxpayers, i.e. those earning CAD200,000 per year or more. This includes setting a cap on how much can be claimed through the stock option deduction. Additionally, with the Liberals pledging to cut the small business tax rate from 11% to 9%, the new Government will also seek to ensure that Canadian-Controlled Private Corporation status is not used solely as a tool to reduce personal income tax obligations for high-income earners.
Aside from the small business tax cut, the fiscal plan is silent on the matter of corporate tax policy. We can take this to mean that the Canadian Government does not intend to alter Canada’s 15% headline rate of corporate tax – the lowest in the G20. However, we cannot rule out the possibility that newly-installed Finance Minister Bill Morneau might spring some surprises in his first budget, and it will be interesting to see how Canada reacts to the OECD’s final reports on base erosion and profit shifting.