Taxes and Budget Windfall on Trudeau Finance Chief's To-Do List

(Bloomberg) -- Summer break is over for Justin Trudeau’s government. It never really started for his finance chief.

Trudeau’s Liberal Party lawmakers gather in British Columbia this week for something of a kickoff to the government’s fall agenda. Times are good. Trudeau continues to ride high in polls and Canada’s growth is leading Group of Seven nations.

Yet questions loom for Finance Minister Bill Morneau. He’s trying to push through tax changes that are causing unease in his party. Canada’s housing market remains in flux, as are Morneau’s proposals to shift more risk to lenders. And an improving economy means he must decide what to do with the revenue windfall.

It all leaves Morneau with a lengthy to-do list.

The Windfall

Morneau projected a deficit of C$28.5 billion ($23 billion) this fiscal year, far more than what Trudeau campaigned on, but surging Canadian growth could substantially trim the figure -- unless Morneau decides to unveil new spending programs.

“They could easily come in C$10 billion below target” on the deficit, said Craig Wright, chief economist at Royal Bank of Canada. “And then what will they do with that? Book it as a pleasant surprise, or get rid of it as a spend?”

Regardless, it will change the mood in Ottawa after Morneau prepared last year’s budget by warning his colleagues the cupboard was bare. He will now face both pressure to spend, and calls to rein in the deficit to shore up federal finances for any economic downturn. Growth is expected to continue in the short-term as government infrastructure spending -- a core pillar of Morneau’s economic plan -- begins to kick in.

Tax ‘Fairness’

Morneau has a controversy on his hands. He announced in July that the government would tighten rules to prevent people -- typically higher-income professionals -- from using certain tactics to pay fewer taxes. Many professionals for instance incorporate to spread earnings to lower-income relatives who don’t actually do work for the corporation. Often, they also stockpile personal savings, such as for retirement, within the corporation. Both moves allow them to reap substantial savings not available to lower earners.

Opponents are pushing back and casting it as an attack on small businesses.

Groups such as the Chamber of Commerce and the Canadian Medical Association have warned of the impact, with the doctors group arguing that it could discourage them from working in Canada.

It leaves Morneau with a choice -- bow to a well-organized campaign against the proposals or press ahead and double down on casting the measure as a “fairness” issue, as he has so far. Morneau has invited comments until October on the proposals, which he projects would raise at least C$250 million annually.

He is scheduled to meet with small business owners and professionals to discuss the issue Tuesday in Vancouver, before holding a press conference.

Housing

Canada’s housing market is in flux. Long a driver of the country’s economy, policymakers tried to rein in the sector -- Toronto and Vancouver, in particular -- to avoid a sharp correction.

Canada’s benchmark home price fell 1.5 percent in July from a month earlier, led by a drop in Toronto. Canada’s booming economy is also spurring expectation that Bank of Canada Governor Stephen Poloz will raise rates as early as this week for the second time this year, a move that could dampen housing demand.

Hanging over it all is Morneau’s proposal to force private lenders to share some of the default risk in the event of a downturn. Morneau launched consultations on risk-sharing last year and has since been largely silent on when it will move forward. Industry has pushed back against the measures.

“This is part of our plan, it’s still very much on the table and we’re going to take the time we need to get it right,” Dan Lauzon, a spokesman for Morneau, said in an e-mail last week.

The government proposals “could disrupt the market and have negative implications on both competition and consumers’ access to financing,” according to a February letter to Morneau from the Trust Companies Association of Canada, representing small and mid-sized trusts and banks. Government should “allow for a reasonable period of time” to let other housing policy changes work through the market.

Mini-Budget

Morneau is also expected to unveil a fiscal update some time in the fall -- one that would likely show deficit projections shrinking as government revenues beat expectations. It could also contain new spending measures, like last year’s C$81 billion in new infrastructure commitments over a decade.

Morneau is also due to chair a meeting of commonwealth finance ministers in Washington during the annual meetings of the World Bank and International Monetary Fund.

Finally, hanging over everything are negotiations for a new North American Free Trade Agreement. Morneau, as one of Trudeau’s most senior ministers, has been lobbying American lawmakers and helping Canada press for what it calls a “modernization” of a deal Donald Trump has threatened to pull out of altogether.

--With assistance from Katia Dmitrieva

To contact the reporter on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net.

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier