Too Much, Too Late - Why the 2024 Budget Won’t Save Justin Trudeau and the Liberals
Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland announced the Federal Budget on April 16, 2024. photo credit: Morningstar
Just hours before the Deputy Prime Minister and Finance Minister Chrystia Freeland announced the Fairness for Every Generation 2024 budget, aimed at making life more affordable and fairer for all Canadians, statistics Canada reported that the inflation rate in the month of March ticked up to 2.9%. Nonetheless, the Federal government proceeded to pitch their 2024 budget which doubled down on carbon pricing, increased the deficit and raised taxes for 12% of corporation’s operating in Canada. Amid widespread struggle with persistently high inflation, this budget's significant spending comes too late in the government's term to effect meaningful generational change. When looking back at this budget a year from now the country will likely still be dealing with persistent inflation, high cost of living and unaffordable housing.
The Carbon Tax – More than a Wedge Issue
The federal carbon tax for some time has been a political rallying point for Justin Trudeau’s opponents. Over the course of the past year the anti-carbon tax camp has expanded to include many Canadians who voted for the Liberals in either or both of the previous federal elections. Affordability and concerns about the consequences of persistent inflation are the main issues affecting the majority of Canadians currently. Tuesday’s inflation report by Statistics Canada for the month of March indicated that the uptick in inflation was driven by high gas prices. It is important to consider that this report provides the data for gas prices only in the month of March, meaning that the April 1, 2024 carbon tax hike on gasoline is not factored into the March inflation numbers. If the same trend prevails and gas prices remain the driver of inflation it is logical to assume that this will continue in April, post carbon tax hike and a substantial gas price jump as producers switch to summer blend gas.
The reality is that the Federal Government could start to address both the inflation/cost of living issue and housing affordability issue by revoking the federal carbon tax. Cutting the carbon tax would provide immediate relief for consumers at the pumps, making life more affordable for middle-class workers who commute, and use gasoline products in their professions (i.e. Landscapers) this relief could then trickle down, benefiting the economy as Canadian workers and businesses realize the savings. The removal of the carbon tax would also slow inflation by mitigating the rise of gasoline prices which are also affected by geo-political uncertainty. This would allow for the Bank of Canada to start to realize the sufficient cooling of inflation necessary to lower interest rates. In turn will enable builders/developers to continue projects which are currently on hold due to interest rates adding to the national housing inventory. It would also allow for many buyers to come off of the sidelines as lower rates create more tenable monthly mortgage payments.
The Trudeau government missed an opportunity on Tuesday to earn political points and, more importantly, take a meaningful step toward addressing inflation and affordability. Most Canadians will likely recognize this as the same economic trends persist through the summer into the fall.
Billions for Housing…Eventually
Every level of Government across Canada is grappling with a dire lack of affordable housing for citizens. The Trudeau Government attempted to address this issue in the 2024 budget through promising over $10-billion to accelerate the construction of affordable housing. Unfortunately, much of this funding is promised over the course of many years. Canadians need affordable housing now. The budget provides limited solutions to solving the issue any time soon and therefore the solutions offered are dependent on the Liberal party being re-elected to a third term in 2025. Given the current public support for the Government this seems unlikely. The Liberals have held power for nine years and have not made any progress on housing affordability, the attempts made in the 2024 budget are likely too much too late to make up for years of inaction or failed housing policy at the federal level.
Capital Gains Increase…Who’s Really Going to Pay?
Budget 2024 introduced an increase in the capital gains inclusion rate from 50% to 66.7% for capital gains, over $250,000, which occur on or after June 25, 2024. A capital gain is realized when a business or individual profits from selling an asset such as stocks, shares in a company or a secondary home. Capital gains also apply to gains provided through a trust. The Government reports that this increase will affect about 0.13% of Canadians (40,000 individuals) and 12% of companies (307,000) in Canada.
Over the past number of days Canadians have started to dig into what this means for their future financial planning and/or their businesses. As it turns out the capital gain tax hike potentially stands to affect more than the reported 0.13% of Canadians suggested by the federal government.
For example, let’s assume Joe is a self-employed electrician working in Toronto. Joe has worked hard for the past twenty-five years growing his business in the Toronto area, however, because Joe is self employed (owns his company) he was not able to contribute to a pension plan in order to secure his retirement. Knowing this Joe invested in rental property ten years ago and planned on accessing the equity of the second home in retirement. When Joe plans to sell this property the capital gain will be more than $250,000 and Joe will be subject to the 67% rate.
The same increases apply to capital gains realized on the liquidation of estates. The Financial Post reports that after June 25th, 2024, on the day that an individual dies the deemed tax rate on the estate will be assessed at the 66.7% rate, should the estate be worth more than $250,000.
Larger businesses are also sounding the alarm that this hike may prohibit innovation in Canada as the increased rate affects profitability. Following the budget announcement Shopify CEO Tobi Lukte took to X (formerly twitter) to voice his concerns about how the Federal government is stifling innovation through creating an untenable tax environment.
This comes at a time when the many Economists and the Bank of Canada are sounding the alarm about plummeting productivity in Canada. One of the most effective ways to address productivity issues is to enable innovation in the private sector, innovation leads to more output which means increased productivity. Increasing productivity makes the Canadian economy more competitive which attracts investment and in turn grows the economy and as a result all Canadians benefit. Instead, the capital gains tax increase negatively affects the amount of innovation Canadian companies are able to invest in and in turn economic growth is slowed.
What now for the Liberals and Canadians?
Only time will tell whether or not this budget is a hit amongst voters. As the Liberals continue the push to sell the 2024 Budget as a positive and fair economic and fiscal policy different generations of Canadians will likely have varying perspectives. For the Baby Boomer generations and better these policies will likely have some implications on retirement security, while not really addressing the issue of the rising cost of living for this demographic. In short, the budget mainly ignores this group and focuses on the younger generations of Canadians identified as millennials and Gen Z. This group was/is the most likely to vote for Justin Trudeau and the Liberals in 2025 and the billions of dollars allocated for addressing housing affordability amongst this group is proof that this is where the Government is shopping for votes. Unfortunately, for the liberals and the millennial/Gen Z generations alike the housing shortage cannot be solved in 12-months no matter how many billions of dollars government throws at the problem. In a year from now the lack of affordable housing across Canada will still be dominating the headlines and the younger generations that this budget aimed to help will realize that the ambitions of the 2024 Federal Budget was too much, too late.
