Middle-class tax cuts a pipe dream as trade war erupts, David Dodge says

Article content

Former Bank of Canada governor David Dodge says Canada’s trade situation with the United States will mean short-term pain for the broad middle class, with fiscal policy requiring renewed focus on savings and investments.

Article content

Article content

“If we’re going to have a hope of regaining growth, we’re going to have to endure some short-term pain, in terms of reduced consumption,” Dodge said in an interview.

Article content

“That will be coming through reduced services provided by government, by increased savings by households and hence reduced consumption by households, and increased investments by corporations and hence reduced dividends and payments to shareholders.”

Dodge added that he believes any politicians currently promising tax cuts for the middle class are misleading the Canadian public.

“I think politicians are being totally dishonest with Canadians and totally misleading as to what they can actually do in terms of government spending and tax policy in the short run,” he said.

Dodge said that in the face of a tariff war, governments will have to adjust expenditures and consider tax cuts for investment and those taking risks with capital, as the focus will have to be on Canada’s economic resilience.

“In the medium run, the only way we’re going have higher real incomes in the future is if we make those investments and increase our savings today, to provide our ability to grow in the future,” he said. “That’s where we are. Any government that says they are going to do a lot of things for the middle class, in terms of reducing taxes or increasing transfers or providing better services, at this point in time is not realistic.”

Article content

Article content

In December, the federal government posted a deficit of $61.9 billion for the 2023-2024 fiscal year, blowing past its fiscal guardrail of $40.1 billion. The deficit is projected to decline to $48.3 billion in 2024-2025 and $42.2 billion in 2025-2026, according to the Fall Economic Statement.

“We are running a structural deficit, that puts us in not as good shape as we should be,” said Dodge.

According to Canada’s latest public accounts, the federal government collected $459.5 billion in revenue in 2024. The two largest revenue contributors were personal income taxes, which accounted for 47.4 per cent of that revenue, and corporate taxes, which accounted for 17.9 per cent of revenue. In third place was the goods and services tax (GST) at 11.2 per cent.

The biggest expenditures in 2024 were expenses associated with government departments, agencies and crown corporations (26.9 per cent), major transfers to persons (23.1 per cent) which includes elderly benefits, employment insurance, children’s benefits. The third most expensive item was major transfers to other levels of government (19.2 per cent) which includes the federal health transfer, equalization payments and early learning and childcare program transfers.

Article content

The Bank of Canada estimates a trade war with the U.S. would lead to investment dropping by 12 per cent and Canadian exports will decrease by a 8.5 per cent if tariffs are in place for a year. The central bank also estimates growth would decrease by three per cent over two years.

“Canada will no longer be an automatic beneficiary of the ever-freeing-up trade order and will no longer be the beneficiary of being able to maximize potential by relying on a North American-wide market,” said Dodge. “That’s where we are, and we just have to be honest and face up to it.”

• Email: jgowling@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content