By Fergal Smith
TORONTO (Reuters) – Canadian Prime Minister Justin Trudeau’s strategy to prioritise spending on the middle class at the beginning of his four-year term will not keep growth humming ahead of a general election in October, some economists said.
Canada led the G7 with 3% growth in 2017, but the boost from fiscal stimulus in 2016 has since faded, with the Bank of Canada expecting growth to slow to a 1.2% pace this year.
In 2016, Trudeau made a tax cut that was aimed at the middle class and began a major increase in child benefits for families. At the same time, he raised levies on Canada’s wealthiest 1%. Trudeau has said that economic policy should be more concentrated on helping the middle classes and those striving to join it.
David Rosenberg, chief economist & strategist at Gluskin Sheff + Associates Inc, said the government’s spending plan has had a one-off effect and will not lead to additional growth.
“The first move to play Robin Hood by raising top marginal income tax rates in the personal sector was a huge mistake … this is a government that got elected on social policies as opposed to economic growth policies,” Rosenberg said.
Three years later, Trudeau of the Liberal Party is lagging his Conservative Party rival Andrew Scheer in opinion polls and the outlook for growth has darkened considerably, also because of a global slowdown.
In Trudeau’s last budget before the election in March, he announced additional spending on middle class voters in the hope of easing the financial squeeze on heavily indebted Canadians, who are dealing with high housing costs and tepid wage gains.
But some economists say a better policy mix would have put more focus on the kind of tax cuts that stimulate investment. Investment tends to boost productivity, which could raise wages and the economy’s capacity to grow.
“Potential growth is no higher, that’s the issue,” said Stephen Brown, senior Canada economist at Capital Economics. “The balance of the stimulus could have been tilted towards more private investment.”
Canadian business investment growth slowed to 0.3% in 2018 from 2.3% in 2017, data from Statistics Canada showed, as the economy contended with lower oil prices, trade uncertainty and a slowdown in the housing market.
Of more concern has been the low composition of Canadian investment in the sectors that tend to be important for productivity. Information and communication technology accounted for about 9% of investment in 2017 versus more than 16% for the United States, data from the Organisation for Economic Co-operation and Development (OECD) showed.
The U.S. has slashed corporate taxes in the hope of stimulating investment and data this month provided evidence that the strategy is working. U.S. productivity rose in the first quarter at the fastest pace in more than four years.
Canadian Finance Minister Bill Morneau has said it would not be responsible to match U.S. corporate tax cuts because it would add “tens of billions in new debt.” While the government has allowed businesses to write off additional capital investments to bolster Canada’s competitiveness some economists say that much more could be done.
“I think that we simply have no choice but to raise productivity in this country (Canada) and I think that investing in start-ups and high tech is crucial for that,” said Benjamin Tal, senior economist at CIBC Capital Markets. “From a taxation perspective, we should encourage risk taking.”
(Reporting by Fergal Smith, editing by Steve Scherer and Grant McCool)