The Top Line
Earlier today, Finance Minister Chrystia Freeland issued a Federal Fall Economic Statement (FES) that is primarily focused on addressing two issues – cost-of-living and housing affordability – that have risen to the top of public opinion polls in recent months.
For several months leading up to the FES, the Liberal government sought to condition expectations for the FES by signaling concern about affordability of everyday living, a pronounced focus on housing, and a commitment to fiscal restraint – and the FES did largely stick to those themes.
Beyond new announcements on housing and cost-of-living, the FES signaled the Government’s commitment to addressing the fiscal deficit and growing federal debt. Notably, the statement extended the government-wide exercise to identify possible budget cuts in every federal department and agency, targeting an additional $345.6 million in reduced spending in 2025-26, and an additional $691 million ongoing. Stakeholders should expect that exercise to be a priority of the public service leading into Budget 2024.
However, by the Government’s own admission, that exercise will only bring public sector spending growth “closer” to pre-pandemic levels and most of the cost savings identified since Budget 2023 have already been re-allocated to healthcare, dentalcare and other areas – ensuring federal spending will actually continue to grow in future years.
Conversely, the affordability measures in the FES are predominantly structured as loans and tax measures in the housing space and as legislative and regulatory measures in the cost-of-living space. These are policies designed to address pocketbook issues in ways that make consumers feel government is on their side, without costing any money. That may reflect an acknowledgement by the Liberals that they simply have no new revenue to spend, as much as a conscious effort to produce a disinflationary fiscal plan.
That approach is especially surprising given the NDP had suggested another GST rebate and/or a GST waiver on home heating should be part of the 2023 FES, along with other new spending. Along with the complete absence of the word “pharmacare” in the FES, this shows the Liberals resisting NDP-favoured spending in a way that could test the two parties’ Confidence and Supply Agreement. That will very much bear watching in the coming weeks.
Overall, the 2023 FES is a partial return to the tradition of brief, detail-light fall fiscal updates that gesture towards deeper policy development in the next budget. As such, many measures mentioned in the FES that may be of interest to stakeholders – such as amendments to the Competition Tribunal Act, further developments to clean tech and critical minerals development incentives, and assessment of the investment mandates of Canada’s pension funds and Crown corporations – will take shape in the coming months and do warrant ongoing monitoring.
A Deeper Dive
The 2023 FES emphasizes that Canada has reduced pandemic era spending faster than any other G7 nation. However, the 2023/24 budgetary balance will actually be equal to the Budget 2023 projection and deficits are projected by the FES to be significantly larger in 2025/26 and 2026/27 than was expected in Budget 2023. So again, federal spending is still growing slightly in the near term.
Meanwhile – according to the Government’s own figures – GDP growth is expected to be flat in 2024, inflation is not expected to return to the target 2% until 2025, and, due to rising interest rates, the debt-to-GDP ratio will only slightly decline through 2028/29.
Taken together, these figures show how little fiscal maneuvering room the Government has in the short-to-medium term, unless the economy unexpectedly gains steam and/or interest payments on the national debt decline sharply.
New Spending and Policy Commitments in the FES
In keeping with the Liberals’ recent focus on attempting to address housing affordability, the centrepiece of the FES is a suite of new policies designed to increase housing supply and construction.
Key new housing measures include:
- $15 billion in new loan funding, starting in 2025-26, for the Apartment Construction Loan Program;
- $1 billion over three years, starting in 2025-26, for the Affordable Housing Fund, which supports non-profit, co-op, and public housing builders;
- $309.3 million for the Co-operative Housing Development Program;
- Making co-operative housing corporations that provide long-term rental accommodation eligible for the removal of the GST on new rental housing (with some conditions and limitations).
The focus on loans and working with housing co-operatives is a shift from the prior Liberal preference for direct transfers to provinces and municipalities. Notably, the FES does not include a recapitalization of the (non-repayable) Housing Accelerator Fund that the Liberals have championed in recent months or an acceleration of spending under the 10-year National Housing Strategy.
Overall, the FES continues the Liberals’ attempts to position themselves as leaders on this issue, including by positioning the response to the housing crisis as a “national effort… that the federal government is leading” and underlining that the Trudeau government has spent nearly double what the Harper government did on housing. Whether or not that messaging resonates with Canadians will likely be central to the Liberals’ re-election chances. Moreover, it is far from clear that the measures announced in the FES can substantially increase housing supply before the next election – now that the clock is very much ticking on that eventuality.
Cost-of-living policies in the form of rebates or direct transfers to consumers – which have been a staple of past Liberal fiscal plans, especially since the beginning of the COVID-19 pandemic – are notably absent from the 2023 FES. Instead, the Government focused on measures like reforms to the Competition Tribunal Act and elimination of added fees on consumer goods and services. That approach echoes some of the Harper government’s policies on pocketbook issues and may indicate a current lack of funds to make direct transfers.
In terms of broader financial sector policy, the FES creates a new National Mortgage Charter, to give banks more detailed guidance on requirements to extend mortgage payment relief to certain borrowers, and commits the Government to introducing open banking legislation that has long been in development in Budget 2024.
Since taking government in 2015, the Liberals have made their climate policies and spending the centrepiece of budgets and economic statements. That is very noticeably not the case for the 2023 FES, in which climate and clean tech policies are stashed in the chapter on building the economy and cloaked in language about clean jobs creation.
Moreover, most climate measures announced in the FES consist mainly of next steps and implementation for priorly announced policies, including;
- A detailed framework for the clean economy investment tax credits;
- Instruction that the Canada Growth Fund allocate up to $7 billion of its current $15 billion in capital for Carbon Contracts for Difference; and
- Promises to implement mandatory climate disclosures for private companies and a federal taxonomy that is aligned with reaching net-zero.
Although not included in the ‘key messaging’ documents for the FES, the statement also includes implementation of the recent suspension of the federal carbon tax on heating oil, as well as the associated top-ups of the rural carbon price rebate and the heating pump subsidy program. Stakeholders should expect the Conservatives to leverage the inclusion of those measures in the FES to make further calls for the complete elimination of the carbon tax during the debate and voting process on the FES.
What This Means for You
In the near term, the government will soon give notice that legislation to implement the FES and certain outstanding measures from Budget 2023 will be introduced, and a vote on the FES will occur before Christmas.
Beyond the House of Commons, the Liberals are urgently seeking to strengthen their economic credentials, and will closely monitor how this narrowly-focused FES resonates on those issues with voters as a measure of the Government’s political health.
And while today’s statement was designed to dampen expectations of significant new spending in Budget 2024, Cabinet Ministers, Liberal caucus members, and the Liberals’ Supply and Confidence Agreement Partners – the NDP – will continue lobbying for new spending. Notably, Defence Minister Bill Blair just told the Halifax Security Forum that the Canadian Armed Forces require significant new funding to maintain operability. How Minister Freeland and Prime Minister Trudeau respond to those pressures will be a key focus in coming months.
Notably, the narrow focus of the FES came at the expense of prior Liberal priorities, including fighting climate change, healthcare (the FES does not mention pharmacare even once), and reconciliation, that are also priorities for the NDP.
How that dynamic impacts NDP support for the Government and NDP desire to maintain its Confidence and Supply Agreement with the Liberals will bear close watching in the coming months.