How the federal tax cut will impact clients

The Liberal government’s personal income tax cut will provide a modest boost for consumers that won’t change the broader economic outlook, according to analysis from big banks.

Finance Minister Bill Morneau tabled a motion in Parliament on Monday to raise the basic personal amount that’s exempt from taxes. The amount will increase to $13,229 in 2020 (from $12,298) and to $15,000 by 2023, resulting in annual tax savings of about $300 per person at that time.

The increased basic personal amount will apply to the roughly 20 million Canadians who earn less than $150,473. Those earning between $150,473 and $214,368 will receive a reduced benefit, and those in the top tax bracket won’t be eligible.

In a report released Monday, Scotiabank economist Rebekah Young said the measure “will provide a small and transitory boost to growth at best.”

The Liberals’ post-election stimulus in 2015, which included an enhanced Canada child benefit, led to a consumption boost for the six ensuing quarters, the report said. The impact from the higher basic personal amount will be less significant because it is broad-based rather than targeting families with children, which are “notorious for a high propensity to spend.”

“Targeting middle income households will provide a welcomed backstop to consumption, but it will not likely shift the growth outlook, inflation expectations, or the policy rate path. Ultimately a resumption of business investment and activity will be required to durably shift expectations,” Young wrote.

A research note from National Bank Financial said the move could provide relief for overstretched consumers.

Canadians owed roughly $1.77 in credit market debt for every dollar of household disposable income in the second quarter of this year, and consumer insolvencies are up 9.2% year over year.

“This relief arguably comes at an opportune time for a household sector that’s reeling from a high debt burden,” the National Bank note said.

The increased basic personal amount was part of the Liberal platform and therefore included in the bank’s growth forecasts of 1.8% for 2020 and 2% for 2021. National Bank noted, however, that the Bank of Canada would likely have to raise its growth forecasts in its next Monetary Policy Report based on the tax cut and U.S. approval of the new North American trade deal.

“That could get markets to drop any remaining expectations of interest rate cuts for next year,” the research note said.

The Scotiabank report also noted Morneau’s pledge to introduce a fiscal update before the end of the year. Based on the Liberal platform and last week’s throne speech, Young said the bank expects the minority government to continue to run modest deficits with the debt-to-GDP ratio declining.

The update “can be expected to take on a cautious tone with an abundance of prudence built in at this stage given it will provide the fiscal baseline against which the entire mandate will be assessed,” the report said.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.