The Top Line
This afternoon, Finance Minister Chrystia Freeland tabled Federal Budget 2022.
During her address to the House of Commons today, Minister Freeland framed the Budget as being about “three pillars”, specifically people (referring primarily to housing and childcare), the green transition, and productivity and innovation. In support of those priorities, Budget 2022 allocates approximately $56 billion in new spending over six years.
While the current sixth wave of the COVID-19 pandemic hangs over the Budget, the tone and main topics chosen for it suggest that the Government is more and more looking past the pandemic to determine its spending priorities. Notably, Minister Freeland’s budget speech included the line: “The time for extraordinary COVID support is over”. While few people would say the pandemic is over, it is undeniable that this Budget is a profound change of the Federal spending focus compared to the fiscal plans of 2020 and 2021. This year, the Government took a far more forward-looking approach to spending, with little mention of COVID-19 economic support programs.
But, while some of the language is different, stakeholders who have followed the Liberals closely will recognize the “three pillars” of the Budget as the same priorities that the Liberal Government has pursued since 2015, when it came to power on a policy platform that emphasized childcare benefits, pricing carbon pollution, and support for the startup and innovation sectors.
Given the current economic context of fairly strong growth coupled with high inflation, low business confidence, and a still-uncertain recovery from the pandemic, the communication of the Budget was always going to be a delicate balancing act for the Liberals.
On that front, Minister Freeland took pains to communicate the Budget as being about investing in growth. For example, new spending on building housing and improving housing affordability and on incentivizing green industries was presented as bolstering economic growth. And the issue of productivity was presented as a longstanding, pernicious issue in the Canadian economy that new government spending programs will resolve. Conversely, heading into the Budget, many private sector economists and business stakeholders had called for reduced Federal spending
Ultimately, it remains to be seen if the Government can convince the markets and Canadians that spending was necessary and resulted in economic growth.
A Deeper Dive
Minister Freeland’s Budget speech argued that the economy is booming and that Federal pandemic support programs were key to that supposed outcome. Of course, the Government may have trouble convincing the public that the economy is booming – a reality acknowledged by references in the Budget to currently low business confidence and consumer concerns about the high rate of inflation.
In favour of Minister Freeland’s case, the Budget shows that Canada has recovered 112% of the jobs that were lost during the pandemic and unemployment is projected to be 5.8% in 2022, close to the near-record low of 5.4% in 2019. Similarly, real GDP growth, at 4.6% in 2021, is more than one percentage point higher than before the pandemic. On the other hand, the Budget recognizes that inflation is at its highest level since 1991.
Ultimately, while inflation has dominated recent finance news coverage, the Budget does not spend a ton of space on the issue (compared to the overall length of the document), labels it “a global phenomenon”, and doesn’t present any policies directly aimed at reducing the rate of inflation. Like in the Fall 2021 Economic and Fiscal Update (EFU), the Government appears to be convinced that inflation will moderate over the near term and can therefore avoid having to take measures to address it. Whether or not that proves to be the case will likely be a major element in the public assessment of this Budget and the Government in the coming years.
Federal Fiscal Snapshot and Anchor
The Budget commits to reviewing and reducing Federal spending, which has been on an upward trend since before the pandemic. However, the Budget does not set a fiscal anchor in the traditional sense of the term – i.e., with a firm numerical value – committing only that the Federal debt-to-GDP ratio will continuously decline.
The budgetary deficit for fiscal year 2020-21 was $113.8 billion, which is $40.9 billion lower than the projection from the Fall 2021 Economic and Fiscal Update. Looking ahead, annual deficits will continue through the end of the fiscal horizon of the Budget, although they are projected to shrink significantly over time. Projected deficits for the coming years start at $52.8 billion in 2022-23 and decline gradually to $8.4 billion 2025-26.
However, despite that fairly drastic projected reduction in deficit levels over time, Federal debt as a percentage of GDP is projected to remain stubbornly high during the fiscal horizon of the Budget, beginning at the current level of 46.5% in 2021-22 and declining only to 41.5% in 2026-27.
For the sake of comparison, Federal debt as a percentage of GDP was not planned to rise above 30% in the Government’s pre-pandemic fiscal planning. Throughout the pandemic, much of the fiscal planning concerning pandemic support programs was predicated on the assumption that spending would be temporary and time-limited. As we emerge from the pandemic, the Government has found other programs and initiatives to fund, meaning that some of the increase in federal spending, compared to the pre-pandemic baseline, appears to be permanent.
A major political narrative for the Liberal Party during Election 2021 was the idea of having big businesses pay their “fair share” of the Federal cost of responding to the pandemic – a cost that is pegged at $350 billion in this Budget.
Budget 2022 proposes to implement that policy pledge by:
- Creating a Canada Recovery Dividend to require banking and life insurers groups to pay a one-time 15% tax on income above $1 billion for the 2021 tax year; and
- Permanently increasing the corporate tax rate by 1.5 percentage points (to 16.5%) on the income of banking and life insurers groups above $100 million.
Those proposals have been fiercely opposed by the big banks in pre-budget lobbying, but the Government continues to believe that the revenue raised by those measures is essential and that the politics of the issue will ultimately favour the Liberals.
For large global businesses, Budget 2022 signals Canada’s plans to implement the global minimum effective corporate tax rate of 15% (a non-binding international target agreed to in 2021) as of 2023. A public consultation will inform that policy.
Budget 2022 also commits the Government to updating the Alternative Minimum Tax, which aims to offset tax-saving tactics available to the wealthy and combat tax evasion.
Finally, for small businesses, Budget 2022 actually proposes an effective tax cut, by changing the phase out of access to the small business tax rate to be more gradual, with access topping out at taxable capital of $50 million (up from $15 million).
Overall, Budget 2022 has the biggest focus on revenue raising of any Federal Budget under the Liberals, which makes sense, given the new programs and initiatives announced in the Budget as well as the spending demands of the pandemic. The Liberals, who have often favoured borrowing to expand government spending, are now also turning to limited tax increases as well. The extent to which those measures are effective at raising revenue will be central to how the Federal balance sheet looks in coming years and could shape further tax increases or reforms in coming years.
Climate and Economic Growth
Responding to climate change continues to be one of the core policy causes of the Liberal Party. Last week, the Government announced an updated climate plan – the Emissions Reduction Plan (ERP) – that included a number of policy pledges that are financed in this Budget. See here for the TSA Analysis note on the ERP. Budget 2022 was always going to be a key complement to the ERP. New measures in the ERP needed budget funding to be actualized, and they received it in today’s fiscal plan.
Building on the ERP, new climate measures announced in the Budget include:
- A skeleton proposal for a refundable investment tax credit for Carbon Capture Use and Storage (CCUS) business expenses, starting in 2022;
- Eliminating the flow-through share regime for fossil fuel sector activities (notably steps to eliminate fossil fuel subsidies were a key requirement of the Liberal – NDP Confidence and Supply Agreement);
- Broadening the Canada Infrastructure Bank’s mandate to include investing in private sector-led infrastructure low-carbon projects, such as small modular reactors; clean fuel production; hydrogen production, transportation and distribution; and CCUS; and
- An announcement that Finance Canada will engage stakeholders to create an investment tax credit of up to 30% for investments in net-zero technologies, battery storage solutions, and clean hydrogen. The design details of the tax credit will be provided in the 2022 EFU.
Key stakeholders had reacted favourably to the ERP, but underlined that it must be well-implemented. Budget 2022 provides the fiscal framework to do that, but much heavy lifting in allocating spending and bringing industry along with key policies remains to be done. Notably, there will be significant stakeholder consultation required to flesh out the CCUS and net-zero investment tax credits.
Innovation and Industry
For the Liberals, investing in industrial and innovation supports development has usually been linked to climate policy considerations, and this Budget is no different. Major spending proposals in this area include:
- Creating a Canada Growth Fund, initially capitalized with $15 billion, to attract private sector investment to help reduce emissions, diversify the economy and restructure supply chains. The fund will be a new public investment vehicle operating arms-length from the Government, similar to the Canada Infrastructure Bank. Details of the fund will be determined by public consultations and announced in the Fall 2022 EFU;
- Allocating up to $1.5 billion over seven years, starting in 2023, for infrastructure investments that support the development of critical minerals supply chains; and
- Updating the Strategic Innovation Fund to create a $1.5 billion stream of the Fund targeted to support towards critical minerals projects.
The Budget also commits the Government to creating an independent Federal innovation and investment agency and modernizing the Scientific Research and Experimental Development (SR&ED) program (with a focus on intellectual property).
Overall, these investments show that the Liberals are not wavering from their approach to linking economic growth to the clean economy and growing Canada’s tech sector, which has been their fundamental approach since Budget 2016.
The Budget presents the homelessness and housing affordability challenges facing Canada as being an issue largely of Canada not having enough homes. This is a surprisingly market-oriented philosophy on the issue for this Liberal Government.
Measures to increase housing supply are a core element of the Budget, with significant new spending occurring in this area. At the same time there is also a transformative new demand-side policy announced, in the form of a two-year long ban on foreign acquisitions of nonrecreational, residential property in Canada. The Budget also pledges that the Government will impose the full business income tax rates on houses that are “flipped” – defined as a house that is sold less than a year after being bought.
Key spending and policy proposals in this area targeted at building homes and helping other levels of government improve housing access are:
- An allocation of $4 billion over the next five years to the Canada Mortgage and Housing Corporation to launch a Housing Accelerator Fund aimed at helping municipalities build 100,000 net new housing units over the next five years;
- Amending the Canada Community-Building Fund and future Federal infrastructure programs to tie funding access for other levels of government to actions to increase the housing supply; and
- An allocation of $1.5 billion to extend the Rapid Housing Initiative for two years.
In terms of direct monetary transfers and financial incentives for individuals seeking to find housing or buy a home, the Budget proposes:
- Providing a one-time payment of $500 to those struggling with housing affordability challenges, with criteria and payment method still to be determined.
- Creating a Tax-Free First Home Savings Account to give first-time home buyers the ability to save up to $40,000 in a tax deductible and tax-free form.
- Doubling the First-Time Home Buyers’ Tax Credit amount to $10,000.
In recent months, housing policy has become a major focus for Federal, Provincial and Municipal governments – as they respond to both the policy challenge of affordable housing and consumer anxiety about the cost of owning a home.
Traditionally in a minority Parliament the days and weeks after a Budget are uncertain times, as political parties jockey for advantage in advance of confidence votes. However last month’s Liberal – NDP Confidence and Supply Agreement has taken the uncertainty out of the post Budget period. Look for many of the measures announced in the Budget to be contained in the first Budget Implementation Act, which we can expect to be introduced in the coming weeks with the goal of having it passed into law before Parliament adjourns for the summer. The stability of the current Parliament should allow stakeholders that support initiatives announced in the Budget to now focus their efforts on having the items implemented.