The Top Line
A year to the day after tabling its first budget, the Trudeau Government tabled Federal Budget 2017 late this afternoon. Those past 365 days have seen significant changes to the global political and economic order. Developments with far-reaching consequences, such as the Brexit vote, President Donald Trump’s ascension to the White House, and a feeling of looming political change in Europe, have all created an uncertain international political and economic environment. Faced with those challenging circumstances, with global politics seeming currently to run counter to many of the core principles of the Trudeau Administration, the Liberal Government opted to defer major policy changes, choosing instead to go with a stay-the-course budget.
In that context, very little new spending was announced, and what new spending is included builds on core Liberal commitments from Budget 2016 and the 2016 Fall Fiscal Update.
Innovation and skills development is the centrepiece of Budget 2017; with the Government hoping that reforms to and renewed investments in the federal programs that support innovation and skills development will spur economic growth and job development in a changing global economy.
As expected, the fiscal outlook projects deficits until 2021/22. There is no plan in the budget document to return to balance, and the 2016 Fall Fiscal Update projected deficits until 2050/51.
Typically, a Government’s second budget is when it will enact transformative policy platforms. While the Trudeau Government did unveil some new policies and tax changes today, it has clearly decided to defer decisions on more wide-ranging policy changes until next fall at the earliest.
Budget 2017 has a four-year fiscal projection window. In that window, annual deficits are projected in the order of:
- $21.8 billion in 2016/17;
- $25.4 billion in 2017/18;
- $24 billion in 2018/19;
- $18.3 billion in 2019/20; and
- $17.3 billion in 2020/21.
The federal debt-to-GDP ratio is expected to decline gradually after 2018 through the end of the budget’s forecast window.
The national unemployment rate is projected at 6.9% in 2017, diminishing slowly thereafter, for a projected average of 6.7% in the 2016-2021 timeframe.
Taxation and Fees
Budget 2017 does not include any large scale changes to the federal tax code on par with last year’s Canada Child Tax Benefit. Leading into Budget 2017, the Government was conducting a review of federal tax expenditures, with results set to feed into the budget, but the review was recently extended through the end of 2017. As a result, while there are some tax changes in Budget 2017, decisions on broader tax reform have been delayed.
Business stakeholders should note that the Government is proposing to make legislative changes to the framework governing fee setting for Government services, including implementing an automatic inflation escalator. Stakeholders should expect fees for many Government services and approval processes to increase as a result of those measures.
On the corporate tax front, Budget 2017 highlights the Government’s commitment to phasing out fossil fuel subsidies. In that light, the Government proposes to modify the tax treatment of successful oil and gas exploratory drilling to treat such wells as enduring assets, and proposes to remove the tax preference that allows small oil and gas companies to reclassify Canadian development expenses as immediately deductible when they are renounced to flow-through share investors.
Excise duty rates on alcohol products will be increased by two per cent effective the day after Budget 2017, and the rate will be automatically adjusted to the Consumer Price Index on April 1 of every year thereafter. Excise taxes on tobacco were also increased.
The Innovation Budget
The centrepiece of Budget 2016/17 is a series of policies that the Government hopes will spur economic growth and job creation by increasing Canada’s capacity for innovation. Taken as a whole, the plan will target six industrial sectors, namely: advanced manufacturing, agri-food, clean technology, digital industries, health/bio sciences, and clean resources. Policy changes and funding allocations were announced in the following areas to feed into the broader innovation agenda.
The Government sees a need for greater synchronicity between Canada’s skills development programs and the needs of the marketplace. To that end, Budget 2017 allocates $225 million over four years, starting in 2018/19, with $75 million per year allocated thereafter, to create a new (unnamed) organization to support skills development and measurement in Canada.
The Government will alter the Labour Market Transfer Agreements (LMTA), based on ongoing federal-provincial consultations, and amend the Employment Insurance Act to broaden the eligibility criteria for LMTA-funded programs. To bolster those policy reforms, Budget 2017 invests an additional $1.8 billion over the next six years to expand the LMTAs. A separate investment of $900 million over the next six fiscal years will create new Workforce Development Agreements, which will consolidate the existing Canada Job Fund Agreements, the Labour Market Agreements for Persons with Disabilities, and the Targeted Initiative for Older Workers.
Federal Innovation Support
The Government is looking to consolidate and reform the federal programs that support private sector innovation. To that end, a new platform called ‘Innovation Canada’ will be created under the Department of Innovation, Science, and Economic Development (ISED) to rationalize federal business innovation programs. To create the platform, the Government will conduct a whole-of-government review of innovation-supporting programs, including those under ISED, Natural Resources Canada, Agriculture and Agri-Food, and the Scientific Research and Experimental Development tax incentive.
Continuing on from the Budget 2016 allocation of funding for innovation networks and clusters, Budget 2017 allocates $800 million (from previously announced Budget 2016 funding), combined with $150 million from the public transit and green infrastructure funds announced in the 2016 Fall Fiscal Update, for a combined pool of funding to create innovative “superclusters”. Funding will be available on a competitive basis beginning in 2017.
The Government will also create a streamlined and expanded Strategic Innovation Fund, consolidating the Strategic Aerospace and Defence Initiative, the Technology Demonstration Program, the Automotive Innovation Program, and the Automotive Supplier Innovation Program. The newly consolidated fund will be capitalized with $1.26 billion over five years.
A new Venture Capital Catalyst Initiative, funded by $400 million on a cash basis from the Business Development Bank of Canada, will disburse late-stage venture capital investment.
Looking forward, the results of the Fundamental Science Review will be published in the coming months, and the Government plans to launch both an intellectual property strategy and a federal science infrastructure strategy in the coming year. The Government also proposes to amend the Investment Canada Act to increase the net benefit review threshold to $1 billion, and the Invest Canada Hub announced in the 2016 Fall Fiscal Update will be rolled out.
The Canada Student Loans program will be overhauled. Program eligibility will be expanded for part-time students, students with dependent children, and adults returning to school. The individual provincial/territorial income thresholds for funding will be replaced with a single, higher federal threshold. The Government will also change the rules governing Employment Insurance benefits to allow unemployed Canadians to pursue self-funded training while receiving benefits.
Youth employment and co-op placement supports are being bolstered, with an additional $395.5 million allocated over the next three years for the Youth Employment Strategy, and $221 million allocated over the next five years to fund a program to create co-op partnerships between industry and educational institutions.
Infrastructure funding was the centrepiece of the Liberal Party’s Election 2015 Platform and of Budget 2016. Budget 2017 continues allocating the funding promised in those documents for transit, green, and social infrastructure. There are also a few notable initiatives for business stakeholders.
Budget 2017 includes a new focus on trade-oriented infrastructure, including the allocation of $2 billion over 11 years for a National Trade Corridors Fund. $50 million is also allocated over 11 years to launch a Trade and Transportation Information system – an open data portal on inter-modal transportation and a program of supports for innovation in getting products to market.
Meanwhile. legislation for a Canada Infrastructure Bank will soon be tabled, with the goal of having an operational bank by late 2017. The Bank will invest at least $5 billion each in transport infrastructure, green infrastructure, and trade infrastructure, on top of the Government’s own allocations in each of those areas.
The Government also has one eye on the future of transportation, with $76.7 million allocated over five years to support a modernization of transportation writ large, including preparing for unmanned vehicles.
Finally, the Budget allocates $4 billion over 10 years, starting 2018/19, to build and improve housing, water treatment, health facilities, and other infrastructure for Indigenous communities.
The Government will create a Federal Carbon Pricing Backstop, to which provinces that do not implement their own carbon tax will be subject. The Government will soon release a consultation paper to develop the technical parameters of the Federal Backstop.
Major expenditures are allocated for: efforts to reduce the release of toxic chemicals in Canada’s freshwater, the implementation of a Federal Air Quality Management System, and accelerated replacement of coal-fired electrical generation.
Funding is also allocated for the development of greenhouse gas regulations for the marine, rail, aviation, and vehicle sectors, and for the development of regulations for heavy-duty vehicle retrofit and off-road vehicles, and for a Federal Clean Fuel Standard for transportation, buildings, and industrial use.
Finally, starting 2018/19, the Government will begin a whole-of-government approach to climate change, including decarbonising the transportation system, enhancing climate action on short-lived pollutants, and developing a legislative framework for offshore renewable energy projects, with a funding allocation of $135.4 million over four years.
Budget 2017 allocated $39.9 million for Statistics Canada to develop and implement a Housing Statistics Framework, with the goal of beginning publication of data by Fall 2017. Similarly, the Canada Mortgage and Housing Corporation was allocated $241 million over the next 11 years to improve data collection and analytics. Those measures could eventually inform a more robust federal policy on housing prices.
As is to be expected, the Conservative Party and the New Democratic Party (NDP) criticized the Budget. The Honourable Rona Ambrose, Interim Leader of the Official Opposition Conservative Party, accused the Government of nickel and diming Canadians to pay for growing federal spending. NDP Leader Thomas Mulcair said that the Budget was a stall tactic, meant to give the illusion of movement, and stated that the Budget does not contain money for childcare.
What Comes Next
The Government’s economic building blocks of infrastructure and innovation are now in place. Other major policy initiatives, such as health care, carbon taxes, and affordable housing are taking shape.
Major tax reforms, which were expected in Budget 2017, have largely been delayed – possibly indefinitely.
Moving forward, the future of the North American Free Trade Agreement will continue to overshadow all domestic fiscal policy deliberations. Ensuring a smooth economic relationship with the United States remains this Government’s #1 priority, and the lens through which all major policy decisions will be made for the foreseeable future.