Banker's Budget

Yesterday was budget day in Canada. It is all day long media coverage of a document that is supposed to outline the democratic desires of the nation and explain how they are going to be paid for.

Of course, that's never what they are these days. They are communications department's propaganda products that set the rules for the political narrative of 3 hours of TV politicos blathering about big and small numbers.

The journalists may go into the budget day thinking that they are going to provide some analysis, but they simply recite the narrative that is in the document and then ask people about it. In response, you say "wow, that number is big" and then say you are either supportive of against that particular big number.

That may seem cynical, but the fact is that budgets are looked at on budget day and basically never again.

This budget was a continuation of that theme with an updated twist, we already knew 99% of what was going to be in it. This government has tried to "flood the zone" with announcements (and then multiple re-announcements) of the "big things" that the Liberals want to do.

Well, that's not totally accurate. The announcements are of large things they want someone else to do. Preferably foreign capital.

And, this is my main critique: it is a banker's budget.

The Liberal government is full of people who think their job is not to actually do anything for Canadians, but to finance others who they hope will want to do things because the government has sprinkled profit subsidies around.

This is a gimmick that has failed working people for 50 years. But, it does work great for capital.

The fact that there were only a couple of things that were new (forestry announcement and some specifics on the non-market housing) meant that everyone had to pretend to be surprised about the budget so they could pretend to be outraged about it.

The rest of the document essentially outlines the regressive redistribution necessary to provide all these profit subsidies.

Hidden is the fact that not much has actually happened because of the government. There is no intervention in the economy and a slow reduction in supports for regular Canadians.

Exactly the opposite of what Canadians thought they were voting for.

I want to focus on one thing that people are (purposely?) confused about.

The big shiny giant mega productivity super duper deduction. The confusion is a little surprising since it was announced back in September.

The deduction is an accounting trick that works by reducing the complexity of borrowing for large investments.

It has a huge price tag attached to it, but it is a very misleading number. Like many of the big numbers in the budget, the deduction cost to the government is not real.

$36.055 billion over five years. Five years? Why five years?

Budgets are political documents, we don't know what policies will be continued and how beyond 2028. Pretending that this cannot be curtailed or squeezed is silly.

But, 5 years is better than 2 because it sounds bigger over longer:

• $2.015B in 2026–27
• $8.870B in 2027–28

Let's stop there. That's almost $11B in two years. Is that a lot of money?

No.

Remember, this is budgeted money, but it is not spent money. This money isn't actually being spent unless there is massive investment from the private sector in new capital.

No one expects massive investment from the private sector in Canada right now.

It is a marginal effective tax rate deduction on borrowing.

I call it a profit subsidy to off-set the expected rise in interest rates.

Many have criticized the big number from all sides. That's a lot of debt says the neoclassical economists. That's too much money not on public services says the Post Keynesians.

Frankly, this is probably the least egregious thing in the budget. Except it doesn't do what the government (and everyone else) says it does.

It does not automatically generate new investment.

But, if was going to result in new private sector investment that was not already planned—we will get to that—then what's the problem? Investment in productive capital is how we get the economic growth (and resulting tax revenue) to pay for everything else.

Does it need additional things to make it do what the government wants it to do? Yes. Is it a ridiculous thing to do on its face? No.

What needs to be added?

Under capitalism, several caveats are needed. Marginal effective tax rate reductions via accelerated depreciation to spur private capital investment only works if:

• You ensure that it goes to actual planned, but currently unprofitable, investment in new production.
• You don't undo that reduction somewhere else. Say, increase interest rates or rising bond yields.
• You pass financial regulations for legally binding anti-avoidance reviews of the spending. Firms will just off-set other planned spending with this deduction that they pretend is spent on new investment.
• You ensure an adequate supply of labour in those areas (which are unknown).
• Provinces cannot undo the deduction with tax increases on the same investment otherwise you are just shifting revenue streams to some other part of the government.

Finally, there is no government strategy to ensure that the investment will increase profitability because there is no industrial strategy to ensure this.

And, this is the real problem with it. Not the amount, but the fact that the investment is not going to happen.

Why?

The only firms that can invest in new production are currently profitable firms who are near full capacity utilization or running old unprofitable machines. Immediate expensing only benefits firms that already have positive taxable income.

And, the only investments that profitable firms are going to make are investments they know are going to result in increased profits from that new production. You don't invest if you are running at 70% capacity utilization on machines that you can barely afford right now, which is the vast majority of firms struggling with the trade war.

The government says this deduction is supposed to spur investment in firms that are not investing in Canada. But, they are not investing in Canada because there is a lower rate of expected profits in Canadian production.

In many ways, the policy essentially assumes that the trade war is over and there will be a demand for new investment in Canada and this will help that. A bizarre assumption given two more years of Trump and Democrats who do not really oppose tariffs.

The deduction does not solve the issue of profitability and neither does anything else the government has announced in the budget.

Aside from all of that, the main (and only real) critique from the left is that it is a productivity deduction. The entire purpose of the deduction is to support replacing workers with machines (increasing Organic Composition of Capital).

The critique is that such a subsidy must be tied to increased wages of the workers who do not lose their jobs and pay into Employment Insurance and the taxes that support training.

Labour-displacing automation subsidized by the government without ensuring increased union density and labour standards means that this is a direct profit subsidy on the backs of workers.

That's the issue, not the cost of the deduction.