Bill Morneau's budget caught between Trump and a hard place: Chris Hall

It's safe to say that the budget Finance Minister Bill Morneau unveils today won't be the one he originally intended as a second instalment of the Liberals' plan to help the middle class — and all those seeking to join it.

With little fiscal room to manoeuvre, the finance minister must also keep his eye on events in Washington

Minister of Finance Bill Morneau will try to balance his government's priorities against what are still uncertain moves by the Trump administration on tax and trade. (Sean Kilpatrick/Canadian Press)

It's safe to say that the budget Finance Minister Bill Morneau unveils today won't be the one he originally intended as a second instalment of the Liberals' plan to help the middle class — and all those seeking to join it.

Part of the reason is that his first budget — with the billions dedicated to an enhanced child benefit and new infrastructure spending, combined with slower than expected economic growth — leaves Morneau little financial room for bold new initiatives.

He can raise taxes, of course, just not on the middle class. And while corporate tax rates, now at 15 per cent, might present an attractive target for a hike, any increase would make Canada less competitive, especially now that the new guy in the White House is talking about slashing U.S. taxes right across the board.

To hear President Donald Trump, his planned tax and spending cuts are huge, even if he might not be able to get Congress to agree. Who knows, the president might even change his mind with a single tweet.

Elephant across the border

But for any country as closely tied economically to the United States as this country is, the risk of getting too far ahead of Trump is simply too great.

CBC coverage of budget 2017

CBC budget coverage begins at 2 p.m. ET with a special pre-budget Power & Politics on CBC News Network and with our live blog at cbcnews.ca.

Coverage continues at 4 p.m. ET with CBC News' budget special with Peter Mansbridge on CBC Television, cbcnews.ca and Facebook, and on CBC Radio with Susan Bonner and Chris Hall.

Watch post-budget analysis on Power & Politics with Rosemary Barton at 5 p.m. ET on CBC News Network and cbcnews.ca, On the Money on CBC News Network at 7 p.m. ET and The National at 10 p.m. on CBC-TV.

It's the other big reason Morneau's second offering won't be as ambitious as he and the prime minister would like. The budget will focus more on setting a policy direction for the future, rather than spending more billions on the needs of today.

"The problem is that we just don't know what Trump will do," says Stéphane Forget, the president and CEO of the Quebec Chamber of Commerce. "And that makes it tough on Morneau."

Insiders say the uncertainty surrounding what Trump says versus what Trump ultimately decides to do played a role in the federal government's decision to push back the release of the budget to the last week of March.

It's one of the reasons Morneau and other cabinet ministers have made so many trips to Washington, and plan to fan out to states that depend on trade with Canada in the weeks ahead.

Morneau's budget is expected to address the need for innovation and skills training. (Chris Wattie/Reuters)

But none of that makes Trump's intentions any clearer.

We know he intends to strip funding, all of it, from the Obama administration's plan to reduce greenhouse gas emissions from power plants. He's also proposing to stop funding climate change research.

All of this as Canada moves aggressively to reduce emissions and impose a price on carbon.

Taxing dilemma

Trump has mused about a border adjustment tax, promoted by some Republican lawmakers, that could make Canadian exports to its largest customer more expensive.

His other tax plans are just as uncertain. But an analysis of Trump's campaign proposals by the nonpartisan Urban-Brookings Tax Policy Centre in the U.S. suggested nearly half of the tax cuts Trump proposed would go to the top one per cent of American earners. Bill Morneau's first budget, remember, raised taxes on the top one per cent in Canada.

New Democrats want Morneau to double down on that group, by increasing the taxes on stock options given to company executives. Ontario wants him to raise the capital gains tax on income properties. Both, obviously, are measures directed at the wealthiest among us.

Competitive pressure

Forget, the chamber of commerce president, has a different recommendation. When in doubt, he says, Morneau should do nothing that will make Canada a less attractive place for foreign businesses to invest, or that will make Canadian companies less competitive than their American counterparts.

He says that means Morneau should be prepared to adjust corporate tax rates down, not up, and to support measures in this budget that will improve productivity in Canada.

"He doesn't need to wait to see what the U.S. will do next year, or the year after that. Canadian companies need help now to improve competitiveness."

That includes a temporary measure to allow companies to more quickly write off their investments in new technology, and a big commitment to an innovation strategy that would help Canadians commercialize new technologies.

Prime Minister Trudeau wasn't revealing much on Tuesday about the budget's contents. He stuck to the now year-old talking points about his government's commitment to the middle class.

"We'll be presenting a budget that will create growth for the middle class. Opportunities for Canadians. Investments in the future of this country that we know that, after 10 years of slow growth under the Conservative government, will turn our growth track around."

Innovation agenda

Even so, there are some hints about the government's plans to make a "down payment" on its innovation agenda.

Insiders suggest Morneau will incorporate a recommendation of Morneau's economic advisory group to expand workplace training to equip employees who lose their jobs to automation with the tools needed in the future economy.

Morneau is also expected to adopt another of those recommendations to use the government's massive purchasing power to support innovation, by allocating a larger share of the $18 billion Ottawa spends each year on procurement to hire Canadian tech companies.

But this budget will be less about how much the government intends to spend, or which taxes can be tweaked, than it is about restating the Liberals' broad commitment to helping the middle class and creating the economy of the future.

It's a safe and cautious approach, especially now, when Trump's plans, and the potential effect they could have on Canada, are not yet clear.


Chris Hall

National Affairs Editor

Chris Hall is the CBC's National Affairs Editor and host of The House on CBC Radio, based in the Parliamentary Bureau in Ottawa. He began his reporting career with the Ottawa Citizen, before moving to CBC Radio in 1992, where he worked as a national radio reporter in Toronto, Halifax and St. John's. He returned to Ottawa and the Hill in 1998. Follow him on Twitter: @chrishallcbc


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