Canada could reduce income taxes for most Canadians and still be able to balance the budget if the government cuts spending by 2.3% over the next two years.
According to a Fraser Institute study, the federal government could balance the budget by 2026 if it cuts $11 billion from its annual spending budget. The report found that this would be possible while reducing personal income tax rates for the middle class, thereby stimulating economic growth.
The study recommends how the government can fix the budget, increase economic growth and Canada’s competitiveness, and set guidelines that the feds can adapt to prevent Canada from falling into future deficits.
Grady Munro, a policy analyst at the Fraser Institute and co-author of the report, told True North that if the government listens to their recommendations, it could reduce the country’s deficit from its expected $39.8 billion this year to a $12.3 billion surplus by 2028 / 2029.
“Canada is dealing with a stagnant economy. Economic growth is not good right now,” Munro said.
Though recommendations on specific cuts were not included in the initial report, Munro identified two areas in which he would recommend the government reduce spending to balance the budget.
“Corporate welfare should be targeted for spending reductions because it represents a significant expenditure on the part of the federal government but does little to promote widespread economic growth,” he said, noting that the government spent $11.2 billion on business subsidies in 2022. “Corporate welfare simply picks winners and losers in the free market and prevents resources from being allocated to their most productive use.”
Munro pointed to government sector employees’ wages as another potential source of spending cuts.
“Government sector employees enjoy an 8.5% wage premium over comparable private sector employees,” he said, referencing past research by the Fraser Institute. We might want to look at that gap to find potential savings.”
According to a report from Canadian Heritage, the CBC will take $1.4 billion from taxpayers this year alone.
The 2.3% cuts would need to be made after the government applied the authors’ recommended changes to personal income taxes.
“By addressing tax rates, we could help kickstart economic growth by addressing our competitiveness problem,” Munro said.
The plan would eliminate the middle three personal income tax brackets of 20.5%, 26%, and 29% and reduce the top marginal rate from 33% to 29% to help attract and retain “highly skilled workers” such as doctors, engineers, and entrepreneurs and improve the economy.
“What Canadians would be left with is a two brackets personal income tax system, where income over $246,000 is taxed at a marginal tax rate of 29%. While everything else is taxed at 15%, so most Canadians will have lower marginal tax rates due to this new structure,” Munro said.
Munro credits Canada’s higher tax rates than the United States or European countries on its “stagnant” economy.
“We propose that the federal government take it a step further. It can adopt fiscal rules that limit the gross annual spending to the rate of population and inflation,” he said.
He said that if the government limits its annual spending to the inflation rate and the population increases, Canada could maintain a balanced budget and even have surpluses.
“We projected a $6.4 billion surplus in 2027/28 and a $12.3 billion surplus in 2028/2029,” Munro said. “We cannot continue running deficits and accumulating debt because that carries costs towards Canadians.”