Federal government’s redistribution economics doesn’t work

From the Fraser Institute

By Jason Clemens, Jake Fuss, and Milagros Palacios

Prime Minister Trudeau’s vision for a more prosperous Canada relies on a much larger role for the federal government, with more spending, regulation, borrowing and higher taxes. By moving existing money around—both from higher-income workers to average Canadians and from the future to the present through borrowing—he believes the Canadian economy will be stronger and living standards will rise. But after nine years of governing, the evidence is clear—the prime minister’s redistribution economics doesn’t work and has actually reduced living standards in Canada.

Let’s first understand the magnitude of the changes made by the Trudeau government. Federal spending (excluding interest costs on debt) has risen from $256.2 billion in the last year of the Harper government to an estimated $483.6 billion this year, an increase of 88.7 per cent.

Even excluding COVID-related spending, the Trudeau government has recorded the five highest years of federal spending (on a per-person basis, after adjusting for inflation) in the history of the country, far surpassing spending during both world wars and the Great Recession.

Under Trudeau, the federal government has introduced several new programs (including dental care, daycare and pharmacare), and expanded several existing programs such as the cash transfer to families with children under 18 and corporate welfare.

Redistributing existing income has been a clear policy goal of the Trudeau government. From 2015 to 2022, average government transfers to families with children have increased from $12,685 to $15,750 (inflation-adjusted), an increase of 24.2 per cent. Yet among these same families, employment income only increased 8.0 per cent during the same period, meaning government transfers grew more than three times faster than their employment income. And as a share of household income, government transfers have increased from an average of 8.0 per cent between 1995 and 2007, when employment income was growing much faster, to 10.3 per cent in 2022.

The Trudeau government has financed this explosion in federal spending by borrowing, which is simply taxation deferred to the future, and tax increases.

Specifically, the government increased personal income taxes on professionals, entrepreneurs and successful business owners. It also increased taxes on businesses, which is an indirect and less transparent way of increasing taxes on average people since businesses don’t actually pay taxes, only people pay taxes. Higher business taxes mean less investment and thus lower wage growth for workers, lower payments to the business owners, and/or higher prices for consumers buying goods and services.

The Trudeau government also opaquely increased taxes on average Canadians. While it lowered the second personal income tax rate, it simultaneously eliminated several tax credits. As a result, 86 per cent of middle-income families experienced an increase in their personal income taxes as did 75 per cent of families with children in the bottom 20 per cent of income-earners.

But again, the government financed much of its new spending by borrowing, which means future tax increases. Consider that total federal debt stood at a little over $1.0 trillion when the Trudeau government took office in late-2015. By the government’s own estimates, total federal debt will reach almost $2.1 trillion next year.

Higher debt means higher interest costs, which divert money away from programs such as health care or badly needed tax relief. From 2015-16 (when Trudeau was first elected) to this year, federal debt interest costs have increased from $21.8 billion to an expected $54.1 billion. For context, this year the federal government expects to raise $54.1 billion from the GST, which means that every cent raised from the national sales tax will go to pay interest costs on the federal debt.

By focusing on moving around existing income (i.e. redistribution) rather than promoting income growth through investment and entrepreneurship, the Trudeau government has helped produce an outright economic growth crisis. Canada’s current decline in per-person GDP, a broad measure of living standards, is one of the longest and deepest declines of the last 40 years. Moreover, as of the end of 2023, the latest year of available data, the decline in living standards had not stopped so there’s a chance this could be the worst fall in living standards since at least the early-1980s.

According to a 2023 study, growth in per-person GDP from 2013 to 2022 was at its lowest rate since the Great Depression. Indeed, Canada’s post-COVID recovery was the 5th-weakest in the industrialized world. And prospects for the future are no better. A recent study by the OECD estimated that Canada would have the slowest growth in living standards among 32 high-income countries for the foreseeable future.

Simply put, the Trudeau government’s policies, which focused on government-led prosperity and moving income around instead of growing incomes, have led to a decline in living standards and economic malaise. Canadians are struggling when we should be leading the world in growth and prosperity. The only way to reverse our economic decline is to embrace a markedly different approach to policy focused on economic growth through entrepreneurship, investment and innovation.

Authors:

Jason Clemens

Executive Vice President, Fraser Institute

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Milagros Palacios

Director, Addington Centre for Measurement, Fraser Institute

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Trump, taunts and trade—Canada’s response is a decade out of date

Published on January 21, 2025

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From the Fraser Institute

By Ross McKitrick

Canadian federal politicians are floundering in their responses to Donald Trump’s tariff and annexation threats. Unfortunately, they’re stuck in a 2016 mindset, still thinking Trump is a temporary aberration who should be disdained and ignored by the global community. But a lot has changed. Anyone wanting to understand Trump’s current priorities should spend less time looking at trade statistics and more time understanding the details of the lawfare campaigns against him. Canadian officials who had to look up who Kash Patel is, or who don’t know why Nathan Wade’s girlfriend finds herself in legal jeopardy, will find the next four years bewildering.

Three years ago, Trump was on the ropes. His first term had been derailed by phony accusations of Russian collusion and a Ukrainian quid pro quo. After 2020, the Biden Justice Department and numerous Democrat prosecutors devised implausible legal theories to launch multiple criminal cases against him and people who worked in his administration. In summer 2022, the FBI raided Mar-a-Lago and leaked to the press rumours of stolen nuclear codes and theft of government secrets. After Trump announced his candidacy in 2022, he was hit by wave after wave of indictments and civil suits strategically filed in deep blue districts. His legal bills soared while his lawyers past and present battled well-funded disbarment campaigns aimed at making it impossible for him to obtain counsel. He was assessed hundreds of millions of dollars in civil penalties and faced life in prison if convicted.

This would have broken many men. But when he was mug-shotted in Georgia on Aug. 24, 2023, his scowl signalled he was not giving in. In the 11 months from that day to his fist pump in Butler, Pennsylvania, Trump managed to defeat and discredit the lawfare attacks, assemble and lead a highly effective campaign team, knock Joe Biden off the Democratic ticket, run a series of near daily (and sometimes twice daily) rallies, win over top business leaders in Silicon Valley, open up a commanding lead in the polls and not only survive an assassination attempt but turn it into an image of triumph. On election day, he won the popular vote and carried the White House and both Houses of Congress.

It’s Trump’s world now, and Canadians should understand two things about it. First, he feels no loyalty to domestic and multilateral institutions that have governed the world for the past half century. Most of them opposed him last time and many were actively weaponized against him. In his mind, and in the thinking of his supporters, he didn’t just defeat the Democrats, he defeated the Republican establishment, most of Washington including the intelligence agencies, the entire corporate media, the courts, woke corporations, the United Nations and its derivatives, universities and academic authorities, and any foreign governments in league with the World Economic Forum. And it isn’t paranoia; they all had some role in trying to bring him down. Gaining credibility with the new Trump team will require showing how you have also fought against at least some of these groups.

Second, Trump has earned the right to govern in his own style, including saying whatever he wants. He’s a negotiator who likes trash-talking, so get used to it and learn to decode his messages.

When Trump first threatened tariffs, he linked it to two demands: stop the fentanyl going into the United States from Canada and meet our NATO spending targets. We should have done both long ago. In response, Trudeau should have launched an immediate national action plan on military readiness, border security and crackdowns on fentanyl labs. His failure to do so invited escalation. Which, luckily, only consisted of taunts about annexation. Rather than getting whiny and defensive, the best response (in addition to dealing with the border and defence issues) would have been to troll back by saying that Canada would fight any attempt to bring our people under the jurisdiction of the corrupt U.S. Department of Justice, and we will never form a union with a country that refuses to require every state to mandate photo I.D. to vote and has so many election problems as a result.

As to Trump’s complaints about the U.S. trade deficit with Canada, this is a made-in-Washington problem. The U.S. currently imports $4 trillion in goods and services from the rest of the world but only sells $3 trillion back in exports. Trump looks at that and says we’re ripping them off. But that trillion-dollar difference shows up in the U.S. National Income and Product Accounts as the capital account balance. The rest of the world buys that much in U.S. financial instruments each year, including treasury bills that keep Washington functioning. The U.S. savings rate is not high enough to cover the federal government deficit and all the other domestic borrowing needs. So the Americans look to other countries to cover the difference. Canada’s persistent trade surplus with the U.S. ($108 billion in 2023) partly funds that need. Money that goes to buying financial instruments can’t be spent on goods and services.

So the other response to the annexation taunts should be to remind Trump that all the tariffs in the world won’t shrink the trade deficit as long as Congress needs to borrow so much money each year. Eliminate the budget deficit and the trade deficit will disappear, too. And then there will be less money in D.C. to fund lawfare and corruption. Win-win.