The Top Line
This afternoon, the Federal Government released the 2017 Fall Economic Statement (FES). A fixture of the fall Federal agenda since the mid-1990s, the FES sets the stage for the next budget and serves as a self-assessment of the Government’s progress on fiscal issues. Increasingly, however, the FES has become a mini budget, and today’s edition was no different.
The Government used the 2017 FES as a platform to:
- Highlight Canada’s strong economic growth, which has driven increased Federal revenue;
- Leverage that revenue to fund new and increased spending initiatives and to reduce the size of the projected annual Federal deficits; and
- Frame the aforementioned developments as proof that the Government’s fiscal policy has been successful, partly as an attempt to turn the page on the recent, controversial proposals for tax reform and criticism of Finance Minister Bill Morneau’s personal financial holdings.
Specifically, the Government announced the following new or increased spending initiatives in the FES:
- Indexation to inflation of the Canada Childcare Benefit, beginning in July 2018, thereby increasing the average payment as the economy grows; and
- An increase of $500 million in the total size of the Working Income Tax Benefit, with the structure of higher individual payments to be announced in Budget 2018.
The Government also re-announced annual reductions of 1% to the small business tax rate, from the current 11%, effective in January of 2018 and 2019.
Taken together, the aforementioned announcements comprise noteworthy new Federal spending, while significantly reducing projected growth of the Federal debt. Importantly, however, the Government still has no plan to return to a balanced budget. Like the United States, the Federal government is showing no concern at this point about ongoing deficits in a period of robust economic growth. The political equation continues to favour spending over balanced budgets. Ongoing high growth for the Canadian economy will therefore be important to the Government’s fiscal performance.
Economic and Fiscal Outlook
The 2017 FES offers a five-year fiscal forecast, running from 2016/17 to 2022/23. Speaking in the House of Commons to present the FES, Minister Morneau announced significant changes to Federal fiscal projections for that period of time.
Due to strong economic conditions since March of this year, Canada’s economy has grown by $8.5 billion more than was projected in Budget 2017. Currently, GDP growth is forecasted to be 3.1% in 2017 and 2.1% in 2018 – higher than the 2.0% that was expected for each of those years in Budget 2017.
Canada currently leads the G7 in GDP growth – since 2015, 450,000 jobs were created – and is expected to do so next year as well. However, GDP growth in the later years of the fiscal outlook is slightly lower than was projected in Budget 2017 – primarily because oil prices are expected to rise more gradually than forecast in March.
Despite that growth, the 2017 FES plans for annual Federal deficits for the entire forecast period. However, those deficits will be lower than projected in Budget 2017. They could have been even lower, but the Government will use some of the higher than expected revenue growth to fund new spending.
Canada Childcare Benefit (CCB)
Introduced in July 2016, after featuring as a key element of the 2015 Liberal Platform, the CCB is a cornerstone of the Government’s fiscal policy. In 2016, the Government committed to indexing the CCB to inflation in 2020. Today, Minister Morneau announced that indexation will take effect in July 2018. The Benefit for a family with two children will increase by $200 in 2018/19 and $500 in 2019/2020. The earlier than expected indexation will add an additional $5.6 billion in spending to the program’s cost between 2018/19 and 2022/23.
Working Income Tax Benefit (WITB)
The WITB is a refundable tax benefit that lowers the tax burden of low income workers. In 2016, over 1.4 million Canadians were eligible for the WITB, at a cost to the Government of $1.1 billion. Beginning in 2019, the Government will increase spending on the WITB by $500 million. The Government will announce in Budget 2018 what the structure of the WITB increase will be, after consulting with the Provinces. The Finance Minister noted in his speech to the House of Commons that the increased WITB will particularly benefit young workers living alone –now the most common form of household in Canada’s rapidly changing demographic mix.
That increased spending on the WITB will kick in at the same time as a $250 million boost to the Benefit from increased program contributions as part of broader, previously announced enhancements to the Canada Pension Plan.
Small Business Tax Rate
Concurrent with the FES, Minister Morneau tabled notice of a Ways and Means Motion to Amend the Income Tax Act with respect to small businesses. The small business tax rate will be lowered to 10% effective January 1, 2018 and then to 9% effective January 1, 2019. The small business tax rate reduction was previously announced as part of the Government’s broader changes to small business taxation policy that were first proposed in July 2017.
Meanwhile, the Government is continuing to develop a revised proposal, to be tabled later this Fall, on rules for income sprinkling by owners of private corporations to members of their family. Similarly, the Government’s revised proposal for the taxation of passive income within a corporation will be included in Budget 2018. As announced previously, the Government intends to legislate that the benefits of investing passively within a corporation would disappear at an annual threshold of $50,000 in passive income.
Traditionally, the FES offers a preview of the Government’s fiscal priorities for the following Budget. The 2017 FES highlights strong economic growth that is resulting in significant additional Federal revenues, beyond what had been forecast as recently as March of this year. Those revenues will allow the Government to use Budget 2018 to pursue additional policies and programs aimed at middle class voters. The Finance Minister stated that the Government will also continue to focus on its Innovation and Skills Plan and infrastructure spending in Budget 2018.