The best thing the new Liberal government can do to improve our personal finances is grow the economy.
Build prosperity and you put some muscle behind measures designed to help the middle class, while also taking the sting out tax increases of high earners. You also address two of the biggest risks to our economy, high debt levels and an overinflated housing market.
The Liberals have said they would cut income taxes for middle-class families enough to deliver maximum savings of $670 a person. That's helpful, but not a difference maker. The same applies to a plan for changes to child-care benefits that could mean an extra $2,500 for a typical family of four.
What families really need is more opportunity in the work force for wage increases and advancement into better jobs. In short, they need to feel more of the forward momentum that lets them save more, pay down debt and, if that's not a concern, increase spending.
The Liberals plan to get high earners to pay more tax in two ways – by increasing income taxes on people with a taxable income of more than $200,000 and reducing the annual contribution limit on tax-free savings accounts back to the old $5,500 level from the current $10,000. There will be some resentment over the government dipping twice into the well of high earners at the beginning of its mandate, but this can be countered.
Tax increases proposed by the Liberals will take the top combined federal and provincial marginal tax rate above the highly symbolic 50-per-cent threshold in Manitoba, New Brunswick, Nova Scotia, Ontario and Quebec. It's easier to accept this kind of increase in an economy that offers the potential to earn more through bonuses and performance-based salary increases.
On tax-free savings accounts, it's worth noting that the Conservative government stopped indexing the contribution limit to inflation when it announced the $10,000 ceiling. The Liberals could cushion long-term resentment over the lower TFSA limit by reintroducing indexing and then delivering economic growth that adds a bit to our moribund inflation rate and thereby starts triggering regular yearly $500 increases in the limit.
As the economy and inflation kick higher, so will interest rates. In fact, BMO Nesbitt Burns said on Tuesday that the Liberal plan for stimulus through infrastructure spending reduces the chance of further interest rate cuts and could even bring the next rate increase closer. This is good. We need higher rates to restore our lost sense of perspective about borrowing.
Our historically high levels of household debt have been driven by a weak economy that has, first, depressed interest rates and, second, deprived people of a rising standard of living that let them finance more of their own consumption without debt. The longer rates stay low, the more we get used to borrowing and living beyond our means. We've had a dozen false starts for a decline in borrowing growth in this country in recent years, and none has stuck.
A growing economy would help us recalibrate. Debt would become more expensive to carry, so we'd cool it on borrowing. At the same time, there would be more opportunity to grow our income through increases in salary and more hours worked.
A stronger economy might also help address the craziness in the housing market in some cities. Affordability is stretched enough now that a modest increase in mortgage rates would eliminate many potential buyers. Crimp demand and prices either stop growing at the same rapid rate or they stagnate and maybe decline. One of the greatest gifts the next federal government could give homeowners would be a soft landing for real estate.
Another benefit of the Liberal plan to grow the economy through deficit-fuelled spending is that it offers an opportunity to set an example for the country on how to use debt constructively. The party promised three years of deficits and a return to surplus in the fourth year of its mandate. If it delivers, it will have made our personal finances stronger and demonstrated the kind of fiscal discipline that is lacking in too many households.
And what if the Liberals can't deliver growth and a balanced budget? Expect more middle-class financial frustration, worsening debt problems and an opening for the other parties to win the next election.
Rob Carrick