The Top Line
This afternoon, amidst a very challenging economic context, Finance Minister Chrystia Freeland tabled the 2023 Federal Budget.
Historically, even before federal spending was drastically ramped up in response to COVID-19, the Trudeau government favoured a ‘something for everyone’ approach to budgets. The government’s past budgets always addressed a wide array of topics, and in 2021 the document was 725 pages long.
In 2023, the Liberals evidently felt circumstances required a slightly changed approach.
As key context for the budget, high inflation, high interest rates, the collapse of strategically important banks in California and Switzerland, slow economic growth, and reduced business confidence have led to economic forecasts for Canada that are the most negative since the financial crisis of 2007-08. The budget acknowledges that reality through Finance Canada modelling that predicts a possible recession in 2023 at worst and marginal growth at best.
Furthermore, the United States Inflation Reduction Act (IRA) is threatening to draw significant foreign investment away from Canada and disrupt Canada’s integrated economy and supply chains within the NAFTA countries.
In that context, the Liberal government tabled a less expansive budget than usual. However, despite its narrower focus, the budget further increases federal spending.
Most of the new and overall spending is targeted at funding public healthcare, building a green economy, driving “friend-shoring” of strategic industries and supply chains, and providing financial assistance to middle and low-income Canadians feeling the effects of inflation.
Also noticeable are the policy areas that did not receive substantial new funding, including topics on which the Trudeau government has spent generously in the recent past, such as: affordable housing, public transit, and infrastructure. Even national defence, which received a lot of new funding in 2022, is not a major focus.
The foundations of the budget – healthcare and green industrial policy – are two areas in which the long-term spending outlined in the budget could be transformative, but may not be, due to implementation challenges. That will bear close monitoring and makes Budget 2023 ripe for revisiting in the coming years.
A Deeper Diver
Budget 2023 is founded on two key fiscal projections that largely echo last year’s budget – and prior Liberal budgets as well. Specifically:
- The government acknowledges that inflation is too high, but is confident it will return to the Bank of Canada’s target range. The budget projects the rate of inflation will slow to 2.6% by the end of 2023; and
- As the Liberals have been touting for many years now, the budget emphasizes Canada is on track to maintain the lowest deficit and the lowest net debt-to-GDP ratio in the G7.
Budget 2023 does not commit to any fiscal anchor, stating only that the federal debt-to-GDP ratio will continuously decline over a 25-year horizon. Historically, fiscal anchors were a budgeting norm, but the Trudeau government has abandoned using them for several years now.
Debt and Deficit Figures
The federal deficit for fiscal year 2022-23 was $43 billion, which is $6.6 billion higher than the projection from the 2022 Fall Economic Statement (FES).
Looking ahead, annual deficits will continue through the fiscal horizon of the budget. Projected deficits for the coming years start at $40.1 billion in 2023-24 and decline to $14 billion in 2027-28. Those figures are substantially higher than the projections found in Budget 2022 and the 2022 FES, reflecting that, while the federal government has allowed some COVID-era programs and spending to expire, it has already added significant new spending, largely in the areas of healthcare and the clean economy.
Coinciding with that, federal debt as a percentage of GDP is projected to remain at or above 40% through the fiscal horizon of the budget. That debt measurement was not planned to rise above 30% in pre-pandemic fiscal projections. That shows the Liberal government has baked some of the higher COVID-era spending into federal finances on a semi-permanent basis.
The budget highlights Canada had the fastest growing economy in the G7 in 2022, with 5% unemployment – near the historic low of 4.9%.
Key details underlying that unemployment rate reveal transformative trends that are driving Canada’s job market and will impact the economy for years to come. Specifically:
- A record high of nearly 86% of women aged 25 to 54 years are working;
- A record high of 80% of Canadians aged 15 to 64 years are working; and
- Canada has the fastest population growth in the G7, with current immigration levels pushing population growth to its fastest rate since the 1950s.
Those trends will be hard to replicate or improve on in the future, which has major implications for business and government planning. It will be worthwhile for stakeholders to explore how those trends will impact their operations and federal policymaking in the near-term, especially in the areas of labour supply, childcare, and housing supply.
Climate and Industrial Policy
The Trudeau government came to power with policy commitments to reduce emissions, address climate change, and support clean technology innovation. Those issues have been a significant focus of all federal budgets since then – and are at the core of the current Liberal brand.
This year, once again, climate-related policies and spending are the spine of the federal budget, but the government has taken a new approach to that policy area.
Historically, the Trudeau government favoured the carbon tax and industry-specific regulations to drive emissions reductions and clean technology development. In fact, until very recently, the Liberal government resisted providing tax incentives for green economic initiatives, since the carbon tax was intended to drive that kind of economic activity and tax incentives can be very costly. But now, the IRA and stakeholder enthusiasm for industrial policy have changed the game.
The climate-related investments made in Budget 2023 are also different from prior years in that they are largely a response to outside factors, not only driven by the government’s policy preferences, and in that they involve significant interfacing with industry, rather than simply layering regulatory requirements on industry.
Major external factors shaping this new policy approach are:
- The IRA, which has already been cited by some companies as a reason to invest in the United States rather than Canada;
- A sustained and strong advocacy campaign from clean technology and natural resource sector stakeholders; and
- Economic modelling suggesting Canada is not prepared for the clean economy.
The visit of President Biden to Canada last week also created a strong incentive for the Canadian government to align its clean industry approach with the IRA.
In response to those conditions, Budget 2023 proposes new investment tax credits, business financing, and targeted investments and programming that the Liberals hope will spur a Canadian green industrial economy. Those policies include:
- A 15% tax credit for investments in clean electricity infrastructure;
- A 30% tax credit for investments in clean technology manufacturing machinery or for investments to extract, process, or recycle critical minerals;
- Details for the Clean Hydrogen Investment Tax Credit, previously announced in the 2022 FES, with support ranging between 15 and 40% depending on project type;
- Expanding the Investment Tax Credit for Carbon Capture Use and Storage to cover more technology types;
- Committing that the Canada Infrastructure Bank will invest at least $20 billion to support clean electricity and clean growth infrastructure projects;
- Extending the 50% reduction of corporate income tax rates for zero-emission technology manufacturers by three years; and
- A new allocation of $500 million over 10 years to the Strategic Innovation Fund.
Additionally, following on the budget, the government will:
- Introduce legislation to enable the Public Sector Pension Investment Board to manage the Canada Growth Fund, a previously announced measure to attract private capital investment in Canada’s clean economy;
- Consult stakeholders to develop a ‘carbon contracts for difference’ program – a mechanism to lock-in the benefits of the federal carbon price for clean technology projects over the long-term; and
- Consult the biofuels sector on policies to support the growth of that sector.
The net impact of those and similar measures over the course of the fiscal horizon of the budget is nearly $21 billion – which is by far the heaviest new spending area other than healthcare.
Notably, no emissions modelling was provided to indicate the government’s projections for how much these policies will reduce emissions. Such modelling was conducted to complement the IRA. The federal government has historically been opaque about its emissions modelling, but monitoring if funds from these policies are allocated with such modelling in mind will be worthwhile.
Healthcare is the area in which Budget 2023 allocates the most spending, with the net impact of such measures over the fiscal horizon of the budget reaching almost $31.5 billion.
Most notably, the budget provides a fiscal framework for the previously announced federal plans to transfer an additional $195.8 billion over ten years to provinces and territories and an additional $2 billion over ten years to Indigenous partners for their healthcare priorities.
In addition, the budget takes strides towards the creation of a public dentalcare program, which is a key commitment in the Liberal – NDP Confidence and Supply Agreement.
Specifically, the budget proposes to allocate $13 billion over five years, starting in 2023-24, and $4.4 billion ongoing to Health Canada to implement a Canadian Dental Care Plan. Beginning by the end of 2023, that plan would provide dental coverage for uninsured Canadians with annual family income of less than $90,000, with no co-pays for those with family incomes under $70,000.
Other Tax and Spending Reduction Measures
The other most significant tax measure in the budget is an extension by six months of the doubling of the GST rebate, which was implemented last fall and flows to low- and moderate-income Canadians. Although the measure has been communicated by Minister Freeland and her team as a ‘grocery rebate,’ there is no obligation on recipients to spend the rebate in that way. That said, the extension of the rebate was a key budget ask of the NDP, and likely crucial in securing its support on upcoming budget votes.
Notably, despite substantial new spending and the expectation of reduced federal revenues, the budget does not contemplate any broad-based tax increases. The government will introduce legislation to increase the Alternative Minimum Tax rate, which offsets tax-saving tactics available to the wealthy, to $173,000. The current, though clearly dated, rate of $40,000 was set in 1986.
More notably, Budget 2023 proposes to phase in a roughly 3% reduction of spending by all federal departments and agencies by 2026-27. Although a moderate reduction that will be offset by inflation, that measure is very out of character for this Liberal government and demonstrates a clear concern about long-term federal revenues.
Budget 2023 will now be debated for four days and will face three votes during that time – each of which can be considered a confidence vote. However, given the Liberal – NDP Confidence and Supply Agreement, the potential of the government falling on a budget vote is minimal. Thereafter, there will be two budget implementation acts later this year.
Official Opposition Leader Pierre Poilievre has already said the Conservatives will oppose the budget, which he called “a bonanza of $43 billion of new inflation, debt and taxes.” Conversely, Jagmeet Singh is positioning the NDP as responsible for “the biggest expansion of our healthcare in a generation.” It is clear the NDP will support the budget and try to get maximum political credit for it.
The Liberal – NDP Confidence and Supply Agreement is now over one year old and has survived two budget seasons. The agreement offered the Liberals some political stability to pass two budgets that were not primarily driven by pre-election positioning – something that most minority governments never get a chance to do. But, by next year, stakeholders should expect the politics of Parliament to sharpen and for shorter term political considerations to play a larger role in budget making.