Facing a credit downgrade, Liberals fail to brand a new tax as “fair”.

Even with the highly unpopular capital gains tax increase, Canada might still face a credit downgrade. So what will the Liberals do with the capital gains tax increase come fall?

As anyone with credit cards, a mortgage, student loans, or a car payment knows, you can only borrow so much before risking a downgrade to your credit score. And as anyone who has a low credit score knows, borrowing money in that situation becomes difficult and costly - particularly in today’s world of high interest rates.

It appears that Canadian Prime Minister Justin Trudeau’s Liberal government never learned that nugget of wisdom as they doubled the size of the national debt in less than a decade. And this year, their debt chickens came home to roost when multiple senior economists and major financial institutions issued warnings that unless the Liberals immediately lessened the size of the federal deficit, Canada would be faced with a credit downgrade. And if the downgrade happened, it wouldn’t just increase the cost of borrowing for the federal government - it would likely further increase the cost of borrowing for every single Canadian as well. If this happened during the middle of Canada’s current affordability crisis, while Canadians were already shouldering some of the highest household debt loads in the world, it could have explosively bad implications for the entire Canadian economy.

So the question became, how would Mr. Trudeau respond to this threat? Again, as anyone with debt knows, there are really only three ways to manage the issue. The first is to reduce spending and stop the bleeding. The second is to increase the amount of sustainable revenue coming into a bank account. The third - and probably worst - option is to keep spending, sell an asset, and delay dealing with the problem even though it’s getting worse.

In this year’s federal budget, Mr. Trudeau’s Liberals chose option three. They did not materially reduce spending in any way, shape, or form, even though their government was (and still is) in the middle of multiple explosive scandals involving shady contractors with close ties to the Liberal party and waste of unfathomable proportions. Nor did they implement any tax relief measures that would have spurred investment that could lead to longer-term growth and, in turn, sustainably increase government revenue. Instead, Mr. Trudeau’s Liberals raised taxes by increasing the inclusion rate of capital gains.

For those unfamiliar with what this means, this change effectively increases the amount of tax paid on the sale of certain types of assets in certain circumstances. However, contrary to how the Liberals attempted to paint the change, it doesn’t impact a tiny group of Canadians - it is forecast to have a massive downstream negative detrimental impact on every Canadian. This fact means that while the Liberal government might see a short-term bump in revenue due to Canadians panic selling off assets before the tax took effect, over time, the tax will hurt many different types of investment, which could lead to lower government revenue forecasts. It could also increase the cost of goods and reduce the availability of vital services like healthcare. 

So in many ways, what Mr. Trudeau’s government did with the capital gains tax increase was akin to selling the family farm to make the minimum payment on the credit card that was used to cover last week’s drunken spending bender. That the Liberals attempted (and failed) to ignite a fake political class war to justify this colossal blunder speaks volumes about their complete lack of capacity to be wise fiscal stewards. But there is hope: Canadians have largely seen through this bullshit and have responded with general outrage. 

However, how the Liberals plan to respond to that anger is uncertain. Last week, federal Justice Minister Arif Virani tried to manage the fallout by putting out a misleading video about what the tax increase actually entailed. But the tax changes are not entrenched in law yet—the Liberals will have to put forward legislation in the fall to make that happen. 

But whether they actually go through with the legislation or not will be largely dependent on how much pressure individual Canadians put on individual backbench Liberal (and voting partner New Democratic Party) Members of Parliament over this summer. Their caucuses are jittery, and Mr. Trudeau is facing mounting calls for his resignation. If their backbenchers feel the heat ahead of this legislation being put forward, they may be able to pressure Mr. Trudeau to walk it back.

But part of that pressure needs to include calling the Liberal’s bluff - the capital gains tax increase was never about fairness. It was a lazy, ineffectual attempt to stop the bleeding caused by an orgy of waste that the Liberals have failed to bring under control. In that, no matter how many taxes the Liberals increase, as long as they keep allowing billions of waste to occur under their watch, Canada’s economic tea leaves show one thing: the Liberals are cruising towards a credit downgrade that will cost Canadians big time.

There’s no fairness in that.