December 7, 2015 / 4:23 PM / 4 years ago

Canada tax hike leaves hole, higher budget deficit eyed

OTTAWA (Reuters) - The Canadian government’s planned tax hike on the rich will not cover the cost of a promised middle-class tax cut, an official projection showed on Monday, increasing the likelihood the budged deficit will be higher than forecast.

Minister of Finance Bill Morneau enters the Senate Chamber for the Speech from the Throne on Parliament Hill in Ottawa, Canada December 4, 2015. REUTERS/Blair Gable

Finance Minister Bill Morneau, releasing the projection as he announced the new tax measures, repeatedly declined to say if he would adhere to the Liberal campaign promise to limit deficits to C$10 billion ($7.4 billion).

Instead, he said the economy was worse than expected and required government investments.

“What you can assume is that as we face up to an economic situation that is more challenging that we expected, as we face up to an oil price that is lower than we might have expected, we recognize that our economy is going to be challenged,” he told reporters.

“So we’re going to continue to move forward with those investments that we believe will improve our productivity and improve our level of growth.”

His document showed the tax hike on the wealthiest 1 percent would bring in C$2.01 billion ($1.49 billion) in 2016-17, while the cost of the tax cut would be C$3.44 billion ($2.55 billion).

Led by Justin Trudeau, the Liberals took power last month promising the increased taxes would bring in C$2.80 billion, almost completely covering what they said would be the C$2.87 billion cost of the tax cut.

Even the downward revision in proceeds from the expected tax hike is too optimistic, according to a study released on Thursday by the C.D. Howe Institute think tank. It said it would bring in less than C$1 billion federally and also cost provincial governments C$1.4 billion a year.

Asked on Monday whether the promise to cap the deficit at C$10 billion was no longer a government target, Morneau sidestepped the question. He said that in addition to making investments, the government believed in reducing the ratio of debt to gross domestic product and reaching balance in four years.

“So those are the specific goals that I am seeking to achieve,” he said.

Canada is a major oil exporter and the crash in the oil price led to an economic contraction in the first half of 2015. Crude has fallen further recently, with the WTI benchmark settling below $38 a barrel, its lowest close since February 2009. That has driven Canada’s dollar to an 11-year low.

Morneau’s motion will also reduce the annual contribution limit for Tax Free Savings Accounts as promised to C$5,500 from C$10,000.

Additional reporting by David Ljunggren and Leah Schnurr; Editing by Peter Cooney

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