Federal government can reduce taxes and balance budget in two years

Canadians are flocking south in record numbers to live in the United States, due likely in part to Canada’s high taxes and faltering economy. Clearly, the policy status quo in Ottawa cannot continue.

First, on the tax front, Canada’s top combined (federal and provincial) personal income tax rate ranked fifth-highest out of 38 OECD countries in 2022 (the latest year of available comparable data). And last year, Canadians in every province, earning a variety of incomes, faced higher income tax rates than Americans in nearly every U.S. state.

Our higher tax rates, particularly compared to the United States, put Canada at a competitive disadvantage in attracting and retaining high-skilled workers including doctors, engineers and entrepreneurs. Moreover, high tax rates diminish the incentives to save, invest or start a business—all key drivers of economic prosperity.

Second, consider the dismal state of federal finances. According to the Trudeau government’s latest budget, Ottawa expects to spend $39.8 billion more in 2024/25 than it collects in taxes, and will borrow to cover the difference. This marks the Trudeau government’s tenth consecutive budget deficit, and the government projects additional deficits until at least 2028/29, driven largely by the Trudeau government’s historically high spending.

Consequently, since the Trudeau government was elected in 2015, federal gross debt is expected to have increased by nearly one trillion dollars, and will increase an additional $400.1 billion by 2028/29. Empirical research shows that rising government debt discourages investment and increases the risk of future tax hikes, which further impedes economic growth.

So, what’s the solution?

Despite the past decade of deficits and debt accumulation, as noted in a new study published by the Fraser Institute, a balanced budget—and tax rate reductions for many working Canadians—are within reach if Ottawa changes course.

Specifically, if the federal government reduced program spending by only 2.3 per cent over two years—and eliminated 49 federal personal income tax expenditures (tax credits, tax exemptions, etc.), which do little to improve economic growth yet reduce government revenue—it could eliminate the three middle federal personal income tax rates (20.5 per cent, 26.0 per cent, 29.0 per cent) and reduce the top rate from 33.0 per cent to its previous level of 29.0 per cent.

While the government would lose income tax revenue, since most Canadians would now face lower tax rates, the money it would save by eliminating the tax expenditures would pay for the majority of the loss.

Moreover, by lowering tax rates for many Canadians, the government would improve Canada’s tax competitiveness relative to other jurisdictions and better incentivize entrepreneurship, investment and other productive activities that promote economic growth and generate tax revenue.

As a result, if the government enacted these spending and tax reforms, it would go from a projected $30.8 billion deficit in 2026/27 to a balanced budget. And by balancing the budget, the government would accumulate significantly less debt and reduce the burden on future generations of Canadians.

As Canadians face high taxes and a stagnant economy, it’s not surprising that record numbers are choosing to leave for the U.S. But this need not be the case, and with modest spending reductions the federal government can reduce tax rates and simultaneously balance the budget in two years.