In next week’s midterm elections in the United States, President Joe Biden’s Democrats will be judged by the electorate. In the past year, Biden has pushed up deficits and taxes to fund a hefty dose of climate, social and industrial subsidies, growth-inhibiting regulations, infrastructure spending and student-loan forgiveness. With runaway inflation and rising interest rates and energy costs, Americans will decide if they like this policy mix or not.

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Jack Mintz: Trudeau follows Biden down the path to economic ruin Back to video

If the polls are right, it looks like the Democrats are in for a shellacking, losing the House and likely the Senate as Republican support surges over economic issues. It is ironic, therefore, that Prime Minister Justin Trudeau’s Liberals chose the same unsuccessful policy path as the Democrats in Thursday’s fiscal update.

The Liberals walk through the valley of inflation and rising interest rates brandishing new deficit-financed spending and tax increases, albeit on a much smaller scale than Biden. With an inflation-induced budget windfall of $30 billion for the 2022-23 fiscal year, almost half has been devoted to new spending in 2022-23, with the balance used to reduce the deficit.

Nonetheless, the massive $1.2-trillion federal debt is predicted to remain above 40 per cent of gross domestic product, at least until the next election. The predicted fall in debt as a share of GDP has been repeated in past budgets but has never been realized, at best remaining at a constant level until the next recession hits. Then a new level of indebtedness is reached, rarely to fall back.

If the update’s downside scenario happens, its impact will be modest, with a mini-recession in 2023. Since the federal Liberals don’t feed off the Garden of Eden’s tree of knowledge, however, it is well possible that this downside scenario is not “down” enough.

Continuing international tensions, slow American and Chinese growth, and a financial crisis in emerging countries could mean that a recession could be much deeper than predicted. With so much uncertainty, a much greater effort should have been made to reduce the deficit to manage risks.

Of course, holding the line on spending is not easy as households strain to cope with rising prices and falling asset values. The Liberals took a leaf from the Biden playbook by promising to eliminate interest charges on student debt, which is a far bigger issue in the United States with high tuition fees. With a bump-up in the GST tax credit and maxed-out interest-free loans, some students from relatively well-to-do families will be able to take that trip to Florida or Europe, rather than work.

With so many programs, whether successful or not, it is not surprising that the government’s only way to improve service delivery is to expand the public service. Like Biden’s approach of throwing more money at the Internal Revenue Service, the update promises another $1.65 billion for Service Canada, the Canada Revenue Agency, border services and veteran’s affairs, along with 1,250 new immigration officers. Maybe we will finally get some passports and visas sent out.

Also copying Biden, the Trudeau Liberals are bringing in a new two per cent excise tax on stock buybacks. The predicted revenues are unlikely to materialize, as companies shift to other means, such as special dividend arrangements or debt repayments, to pass on their profits to investors.

Of course, the real reason companies pay out profits to their shareholders is that investors have more profitable opportunities to invest in than the companies. Putting money in the hands of shareholders may improve Canada’s productivity rather than trapping it in companies that can’t spend it. So, what is the point of the excise tax?

As the fiscal update recognizes, Canada’s private-sector investment has been lagging. One particularly intriguing statistic in the update is rather depressing: in the next five years, labour productivity is expected to decline to 0.7 per cent, from our sub-par performance of 1.1 per cent of the past 50 years.

The productivity challenge will likely be even more difficult. Friend-shoring trade barriers, a rapidly aging population, higher real interest rates, new taxes on the rich and a costly energy transition could suppress productivity growth even more.

Following Biden’s path, the policy response in the update is to throw subsidies at certain sectors that the government identifies as future growth areas. That is not how the world works. Industries come and go and within each industry there are stars and dogs. Governments might look for moonshots, but instead they often end up with white elephants. The best strategy is simply for governments to get out of the way by reducing regulatory and tax barriers, so the private sector can succeed. The mother of invention is necessity, not subsidies.

Besides, giving billions of dollars to industry groups can worsen income inequality. With $83 million to the wine sector, $30 million in regional development grants and $1.2 billion for supply management, many business owners will walk away with pockets stuffed with money. The multi-billion-dollar slush funds and various clean technology investment tax credits are aimed at politically favoured sectors, while other industries languish with over-burdensome regulations and new taxes.

After the update, much has been made about the federal government adopting a more prudent financial path. I don’t see it. Instead, it is the same old, same old — a Biden-like path with high public spending and more taxes.

Financial Post