I recently shared some of the lessons my son learned while visiting a casino together. After witnessing the federal government’s budget last week, it feels a lot like we’re back making bets at the casino again and losing money.

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Ottawa's budget makes it feel like Canada is betting at the casino again and losing Back to video

In my opinion, near-term politics clearly remain in the driver’s seat in directing fiscal policy when we should be investing to create a stronger economy to lift us out of this worsening affordability crisis.

The federal government seems to be caught in the classic “loss aversion” trap, which is when a person takes greater risks after losing money in order to try to gain back what was lost. In this case, their popularity has been taking a huge hit in the polls, so it isn’t surprising to see a budget that appears to be designed to try to win voters back.

The problem I have is how they’re planning to pay for it with more debt and tax policies that will impact investors’ willingness to fund growth opportunities.

Capital gains tax

This includes changing the capital gains tax in such a way as to motivate Canadians to accelerate capital gains crystallization, especially within corporations, as a means to offset some of the large spending increases ahead of next year’s election.

More specifically, adding the June 24, 2024, cutoff was clearly intentional since it will result in an estimated incremental $4.95 billion in revenue, while falling to $1.3 billion in the 2025 election year, according to the government’s forecasts.

According to University of Calgary economist Trevor Tombe, these changes now move Canada from 14th to third in terms of ranking among the Organization for Economic Co-operation and Development (OECD) for top marginal capital tax rates, just below Denmark and Chile.

We wonder how this will impact the level of capital investment in this country by the wealthy families and corporations that reside here, especially considering the billions of dollars of foreign direct investment (FDI) that have left over the past few years.

As public policy expert Jack Mintz recently noted, “during the Trudeau years of 2016-2022, FDI inflows fell 15 per cent while outflows rose 16 per cent. The negative FDI balance was US$23.9 billion per year, three times higher than in (Stephen) Harper’s final five years. From 2016 through 2022, close to $225 billion in capital was lost as more direct investment left the country than came here.”

Productivity problem

This is concerning because we have a serious productivity problem that is worsening by the day, but our current leadership is refusing to acknowledge and address it for some reason. The reality of the matter is that per-capita GDP has declined in five of the past six quarters, resulting in the worst sustained drop in more than three decades. We are now where we were just before Prime Minister Trudeau was elected — that’s zero growth in eight long years.

For some shocking perspective, when ranked against the 52 states on a per-capita-GDP basis, Ontario is now at similar levels to the United States’ least productive ones such as Alabama and Arkansas, while other provinces like British Columbia are ranked worse than Kentucky.

We think the problem was compounded when the government turned its attention to changing the tax structure for small businesses six years ago while ignoring important factors such as the capital risk these professional entrepreneurs were taking.

At the time, they were the biggest employer in this country and the backbone of innovation and disruption, which is something we sure could really use right now, given our oligopolies and what we pay for groceries, cellphones and banking fees.

Instead, this segment of the market is being replaced by Canada’s civil service, which is now the fastest-growing segment of employment in the country. Since 2015, the federal public service has grown by nearly 41 per cent, and the total compensation for federal bureaucrats has grown by 37 per cent.

I am also concerned that this budget continues to put the Bank of Canada in a very precarious position in terms of balancing the value of our currency against the interest costs being levied on all of us, including the federal government. We now have a shrinking economy, the risk of a falling dollar and interest rate pressure from all the debt issuance used to support large deficit spending.

This isn’t expected to improve anytime soon since the government is increasing federal spending by 10 per cent over the next two years. Mintz points out that “from fiscal years 2022-23 through 2025-26, the government’s financing requirements will have grown by 61 per cent while the interest it is paying on its debt will be up 57 per cent.”

It’s time to stop doubling down on policies that aren’t working and further disincentivizing our capital providers. Instead, we should view them as partners and start working together on ways to improve our standard of living via improved productivity and positive per-capita growth.

Or, as Kenny Rogers famously sang, “You got to know when to hold ’em, know when to fold ’em. Know when to walk away and know when to run.”

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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