Bill Morneau on tax cuts and fiscal realities

Evan Solomon in conversation with Finance Minister Bill Morneau on what slowing growth and the new fiscal reality mean for Liberal spending promises

Finance Minister Billl Morneau outlines the Liberal's new tax strategy during a briefing in Ottawa on Monday, Dec. 7, 2015. THE CANADIAN PRESS/Adrian Wyld

Finance Minister Billl Morneau outlines the Liberal’s new tax strategy during a briefing in Ottawa on Monday, Dec. 7, 2015. THE CANADIAN PRESS/Adrian Wyld

The new Finance Minister Bill Morneau is in a bind: does fulfilling his big tax-cut promise mean breaking his deficit ceiling promise? The Liberals promised $10 billion a year in deficits, but the finance minister is now careful to avoid repeating that promise. When asked directly if he will need higher deficits to meet his promises, he cites his target of lowering the debt-to-GDP ratio instead. Is he signalling higher deficits to come?

Morneau does, however, refuse to back down from the promise that the Liberal government will balance the books by 2019. That promise has also been questioned. The parliamentary budget officer has called his forecast “optimistic” and suggests the deficits are now structural. Morneau admits he is “an optimist,” but he is short on details as to how he will achieve balance, other than to stimulate growth through more investment.

Only a month into his mandate, Morneau is under fire for a third broken promise, this time on the middle-class tax cut. During the campaign the Liberals promised to drop the tax rate from 22 per cent to 20.5 per cent on people earning between $45,282 and $90,563. They also planned to introduce a new tax bracket of 33 per cent for those earning over $200,000. Morneau will follow through on that. But during the campaign the Liberals said it would be tax-neutral, meaning the $3 billion they would lose in revenue from the tax cut would be made up by $3 billion in new revenue from the tax hike. Now Morneau agrees the government will not make up that revenue, leaving them with a fiscal “gap.” Asked how he will make up for that gap, he said he will deal with that in budget consultations.

With slow growth, the price of oil hitting a 10-year low of $38 a barrel, a commodity price meltdown, a growing trade deficit and bad job numbers, the finance minister is having a hard time balancing the spending promises with the new fiscal reality.

We asked him what promises he can still keep and what he might have to break.

Listen to the interview, or read the transcript below

Q: All right, let’s start with the tough business of governance. When you first got the job, you said the cupboard was more bare than you thought, and they’re going to be tough to meet some of the promises. Will your government be able to stick to its promise of a $10 billion a year deficit or, given the fact that there’s slower growth, $38 a barrel oil, the cupboard’s bare, will you have to break the promise of $10 billion a year deficit?

A: Well, here’s what we found, as you know. We got in and the economic outlook was not what we might have expected. We have a combination of slower global growth. The IMF told us that we could expect lower growth. We have much lower oil prices than were expected in the Budget 2015, so we’re facing challenges that are important.

In that context, we know that Canadians understand that. We need to make investments in the economy to hopefully improve our rate of growth while at the same time we do need to be careful about our spending, so we’re going to keep our commitments of net debt-to-GDP going down during the course of our mandate and ensuring that we get ourselves into a balanced position within the course of our mandate.

Q: Okay. So I just want to clarify. Debt-to-GDP ratio will go down; you’ll keep that. You’ll keep the balanced budget — and I’ll get to that in a second — but you’re saying that whether it’s $10 billion or maybe $11, $12, $20 billion a year deficit, you’re saying that is the variable. That, you might not stick to.

A:  Well, what we’re going to do over the course of the next couple of months, as you likely know, is we’re going to get into budget consultations with people across this country, not only parliamentarians, but people sitting around tables coast to coast. Through the course of those discussions and putting in place our campaign commitments, we’ll come up with a budget. So I’m not in a position yet to tell you exactly what that budget will look like, but what it will look like for sure in terms of themes is focus on economic growth, focus on being responsible with Canadians’ resources, so that we can get ourselves into a better position this year, next year and for the years to come.

Q: Ah, and I get that, but you know you’re going to get asked a hundred times, ‘Are you going to stick to that promise of the $10 billion and then balance?’ And you’re saying, okay, we’re not in a position on that. Let me ask you about balance because I talked to the Assistant Parliamentary Budget Officer Mostafa Askari who was on the program, and as you know, his show says – his report says that you’re being optimistic in terms of balanced budgets. And he used the word structural deficit, that there’s a structural deficit problem and you won’t be able to – unless you have new revenues, you will not be able to hit budget on your current forecast, a balanced budget by 2019. What do you make of that?

A:  Well, you know, we are of the view that we need to consider every reasonable economic piece of advice out there, so we look at the Parliamentary Budget Officer and say that that’s helpful. It’s another point of context. Our estimates, which are built off financial forecasts from 15 of the best economists in the country, plus our estimates against that of what we think will happen with growth lead us to conclude that we can get there during the course of our mandate. That will be something we’ll provide more information for during the course of our budget cycle, and obviously, it provides us with a goal to get to.

Q: One of the problems there is that your tax cuts and tax hikes are not as promised, revenue neutral. There was of course the C.D. Howe Institute report, and as you announced today, there’s going to be a tax cut from 22 percent to 20.5 percent for people earning between 45 and 89 thousand dollars, but there’ll be a new tax bracket of 33 percent for people earning beyond $200,000. The problem is the tax cut will cost the government $3 billion in revenue, and as we understand from the C.D. Howe reports, now there’s – you’re only going to make a billion or so back on the tax hikes. That leaves you with a pretty big shortfall. Where do you come up with the short – the money that you lose on that?

A:  Well, we are going to make these middle class tax breaks, which will result in a significant amount of money going back to Canadians. We think that’s important. We think it will help the economy, and while we do that, as you said, we’re going to make an increase on taxes for those people who’ve done particularly well. We do know that when we make these estimates, it’s important to be prudent. We don’t want to overestimate the amount of revenue we’re going to get from the tax increase and we want to be careful about looking exactly at what we’re going to give back to Canadians. So yes, when we – when we add in that factor of prudence, we do see that there’s a gap, and that’s something that we’re going to work to deal with.

Q: Okay, but can you tell us how big the gap is?

A: We’ve released what we see as the gap, and you’ll see it in the numbers that we put out today.

Q: The other – the other issue on that, if there’s a shortfall on that will be the cost for the new Canadian Child Benefit. As you spoke about that, that’ll be introduced as well for – in July of 2016. Can you give us a cost of what the Canada Child Benefit that you’re going to introduce, which is nontaxable, what will that cost the government?

A:  Well, I’m not going to be able to give you the exact number right now of the child – the child benefit, but let me say this. This is a very important benefit that we’re putting out there for Canadians. This is going to be a benefit that will take 315,000 children who are currently living in poverty out of poverty. Overall, our tax changes and the Canadian Child Benefit are going to put us in a situation where we’re helping nine out of 10 Canadian families. These are really important moves that are going to help Canadians deal with what we see as an economy in a slow growth model.

Q: Yeah, we are in slow growth. And that’s going to be tricky for you. And I know, look, we have 36,000 jobs lost in October, I mean obviously fuelled a lot, we know, by the election hiring and firing there, but still, we’ve got slow growth. We’ve got unemployment that’s significantly higher in Canada than at the U.S. where it’s five percent there. And we’ve got a trade deficit, and our exports are dropping. Our trade deficit grew to $2.8 billion. So we’ve got a growing trade deficit. We’ve got unemployment. We’re losing jobs. We’ve got slow growth. We’ve got a commodity meltdown and the price of oil at 38 bucks. I’m laughing, but not because it’s funny, because these numbers make your job really tough to come in at balance. Does this just mean you’re going to have to revise your spending plan and maybe even revise your stimulus plan?

A:  Well, I’m a natural optimist, and what we’re looking to do here is to make significant investments in our economy. We’re going to make investments in infrastructure that will not only help productivity, which is a help to our economy, not only create jobs, which is a help to our economy, but actually stimulate growth. We think this is the right way to deal with a low growth economy. It’s a plan for growth, and we will be facing challenges together, but by focussing on the ways that we can enhance growth, we collectively have a better chance at ensuring a stronger future for us and for our children and the people who come after.

Q: But growth is the – is the genie in the bottle. Everybody wants to stimulate growth, and Doug Porter of BMO said, quote: “The underlying job growth is grinding along at an achingly slow pace.” I appreciate how everyone wants growth, but do you think that there’s enough stimulus in the investment to infrastructure that you’re talking about that can actually have an immediate effect on growth here in Canada or are we at the mercy of more international forces and to have growth, you have to have in fact a bigger stimulus package?

A:  Well, I think we have to recognize that the international factors that we’re facing do make things challenging. It’s just the fact that the IMF has lowered our expectations for global growth, but we also need to look at what we are proposing to invest in infrastructure and recognize that it’s a very significant 10-year plan, $120 billion over a decade to stimulate growth, to enhance our productivity. These are large numbers. We believe that they’re going to help us to make a difference, but that’s not all we’re going to need to do. We’re going to need to make sure that we are fiscally responsible. We’re going to need to make sure that we take initiatives to think about how can we best enhance our growth rate. That’s going to include not only tax changes, but it’s going to include thinking about how we can do trade agreements that make sense. It’s going to think about how we can work together with the provinces to enhance growth across this country. We’re not stopping here. This is going to be our focus. Growth is what’s going to matter.

Q: All right. I’ve got about a minute and a half left. Real quick. Lisa Raitt will be on this program after, and she’ll say Bill Morneau’s got a credibility problem. They’re breaking a promise on the $10 billion deficit, and they’re going to break the promise on the balance. What’s your response to that?

A:  Well, first of all, I want to say that it was a real pleasure to be in the House of Commons today for my first Question Period. Lisa Raitt was across the aisle, as you know, and she was respectful, but I expect that she’ll hold me to account during the course of our mandate. We are going to follow through, Evan, on our platform commitments. We think the right thing to do is to make investments. We think the right thing to do is to focus on how we can reduce our net debt-to-GDP. I think that those initiatives are things that Canadians are going to recognize are the right way to – to move forward in the face of some economic challenges, and we’re going to do it for Canadians.

Q: And finally, Tom Mulcair said look, these are not tax breaks for the middle class. People who make $89,000, they’re going to receive the most tax cut. The people receive under 89,000, $45,000, between 45 and 89 thousand, they’ll see less of a tax cut than the people between 89,000 and 200,000. What do you – what’s your response that you’re giving tax breaks essentially to the rich, but the real middle class, the 45,000 to 89,000 are not going to see the maximum tax cut?

A:  My response is this is our first step. These tax cuts that we promised for Canadians are the first step in improving our collective economic situation. On top of these, as you know, we’re going to be introducing additional measures in our budget that are going to make a real difference for Canadians and are going to help us to face a challenging economic situation.

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