The Top Line
Earlier today, Deputy Prime Minister and Minister of Finance Chrystia Freeland presented the Federal Economic and Fiscal Update 2021. In the recent context of fluid economic indicators – for example, strong employment rates coupled with increasing inflation – the fiscal update was highly-anticipated as a potential indicator of the Government’s long-term approach to spending during what is expected to be a prolonged recovery from the COVID-19 pandemic.
Since forming government in 2015, the Liberal Party has usually presented ‘Fall Economic Statements’, which essentially served as mini-budgets, complete with significant new spending initiatives and budget-style communications. This year, the Government opted to provide a more traditional fall update, with very few new spending measures. Reading between the lines of the update, that approach is reflective of the Government still being uncertain about the long-term outlook for the pandemic and public health.
Indeed, Minister Freeland’s speech about the fiscal update underlined that pandemic-management remains the Government’s highest priority. The Minister argued that fighting the pandemic is the key to ensuring short and long-term economic health. That said, the fiscal update included only marginal new spending on public health, in the area of $30 billion – which was largely offset by increased Federal revenues due to inflation. In the absence of new spending, a large portion of the fiscal update was dedicated to re-announcing current pandemic supports for businesses and workers, as well as those that will take effect when Bills C-2 – An Act to provide further support in Response to COVID-19 and Bill C-3 – An Act to amend the Criminal Code and the Canada Labour Code are passed. Notably though, there were repeated references in the update to making those benefit programs more targeted – signalling that the Government will consider shrinking the scope of those programs in the months ahead. Doing so would carry not-insignificant political risk, since the NDP has consistently pushed the Liberals to spend generously on transfers to citizens during the pandemic.
Meanwhile, many stakeholders are increasingly concerned with rising inflation, and the fiscal update does address that topic at length – though not in a way that is likely to blunt the political criticism that the Government is facing due to rising costs of living. The fiscal update positioned Canada’s current inflation rate as a function of consumption patterns shifting from in-person activities to consumer goods during the pandemic, reshaping global trade networks after near-worldwide lockdowns, climate change, and pent-up consumer savings. So, the Liberal explanations for inflation demonstrate a mindset that inflationary pressures are due to i) global economic factors largely beyond the Government’s control and ii) environmental factors (i.e., climate change) that the Government can address through increased spending. Those will be difficult political arguments for the Government to make, and ones that are unlikely to convince stakeholders already raising alarm about inflation, which notably include the Official Opposition Conservative Party.
A Deeper Dive
Other than a commitment to maintain the fiscal anchors that were outlined in Budget 2021 (to reduce the federal debt-to-GDP ratio over the medium-term and to unwind COVID-19- related deficits), the fiscal update is virtually silent on returning to more “normal” Federal spending levels. The update did include Notice of Ways and Means Motions to introduce a few tax increases, notably including a digital services tax and an unused housing tax.
However, the update did not speak to the Liberal Party’s election 2021 pledge to levy a surtax on bank and insurance companies with profits of more than $1-billion, which would add more substantially to Federal revenues than the above measures. In that context, the fiscal projections of the fiscal update should be considered very provisional – pending Budget 2022.
According to the Government’s estimates, the annual deficit will remain abnormally high through the end of the current fiscal year – reaching a projected $144.5 billion. After that, the Government plans for the deficit to decline substantially, to $58.4 billion in 2022-23 and $43.9 billion in 2023-24. Over the longer term, current projections are for annual deficits to dip below $30 billion in subsequent years, which is in line with the deficits that the Government was running in budgets immediately preceding the COVID-19 pandemic.
However, even with that plan for comparatively reduced spending over the long term, the national debt-to-GDP ratio is in the range of 44-48% over the entire 6-year horizon of the update, which is substantially higher than pre-pandemic levels and only slightly lower than the projections from Budget 2021. The Government projects that the national GDP will reach pre-pandemic levels by 2022. The fiscal update also celebrates the fact that, on a net basis, Canada has recovered all of the jobs that were lost during the worst of the COVID-19 pandemic. Despite that, the update takes pains to underline that the Government is willing to spend further to support vulnerable sectors, such as tourism and businesses that rely on large gatherings of people.
Fighting COVID-19 and Supporting the Economy
Under the $30 billion in new spending for measures to help eradicate COVID-19 and support businesses through the end of the pandemic, major new initiatives announced today include:
- A proposed allocation of up to $2 billion for procuring COVID-19 treatments and a commitment that the Government has negotiated the ability to procure vaccine adaptations for variants of concern;
- A proposed allocation of $1.7 billion to support provinces and territories in securing rapid testing supplies;
- An extension of the Highly Affected Sectors Credit Availability Program to March 31, 2022; and
- The creation of a ‘Small Businesses Air Quality Improvement Tax Credit’ of 25% on eligible air quality improvement expenses.
The above is in addition to measures found in Bills C-2 and C-3 to extend the major pandemic business and worker support programs, such as the lockdown benefit and recovery hiring program. Meanwhile, the Government will convene provinces, territories, and other stakeholders to develop a national action plan to legislate paid sick leave across the country.
Today’s fiscal update was an exercise in updating the government’s economic outlook and adjusting existing programs to the current circumstances of the pandemic – not the mini budget of many recent years. In that context, stakeholders who are implicated by new spending or taxation measures announced by the Liberals during Election 2021 should be very engaged on the Budget 2022 development process, which will now have outsized importance. Watch for the Finance Canada and House of Commons Committee pre-budget study processes to start imminently, and engage Minister Freeland’s team proactively. . Watch for the Finance Canada and House of Commons Finance Committee pre-budget study processes to start imminently, and engage Minister Freeland’s team proactively. Budget 2022 will also have more political importance than the fiscal update, as the further we get from Election 2021, the more Opposition parties will be emboldened to oppose the Government on spending and confidence measures – something that is not a likelihood for anything announced today.