As the Canadian economy transitions from the current high inflation period to a worrisome phase of negligible economic growth, the Trudeau government held up their end of the bargain with their NDP partners in the House of Commons, with the release of a federal budget devoting its limited fiscal space to three major priorities: clean economy jobs; health and dental care, and targeted inflation relief.
Economic Top Line
Public finances are taking a massive hit as real GDP growth is projected to decelerate from a strong 3.4 percent in 2022 to a near-recessionary 0.3 percent in 2023 (worse than the 0.7 percent forecast in the fall economic statement), before rebounding to 1.5 percent in 2024. Against this dire backdrop, the Liberals are pointing to Canada’s relative performance with the strongest economic growth in the G7 since 2021.
As a result of slower growth, the government is forecasting a larger $43 billion deficit in 2022-23, declining to a $14 billion deficit in 2027-28 – significantly worse than the path to balance forecast in the fall economic statement. While the government continues to tout the lowest net debt (federal and provincial) in the G7, Canada’s debt to GDP ratio will grow from 42.4% in 2022-23 to 43.5% in 2023-24 before it is forecast to decline.
On the plus side, inflation is slowing, dropping from an annualized high of 8.1% in June 2022 to 5.2% in February, leaving the government with the challenge of providing targeted supports without further fueling inflation.
At 5% unemployment, close to the record low of 4.9%, Canada is experiencing labour shortages in many key sectors including health care and construction, requiring a greater focus on immigration and training for marginalized Canadians to bolster the workforce.
Clean Economy Jobs
On the heels of US President Joe Biden’s visit to Canada where he championed new investments in clean economy jobs, the Liberals sought to match the Inflation Reduction Act though several significant new measures.
The headline initiative is a new 15% refundable Clean Electricity Investment Tax Credit to support and accelerate new and refurbished clean electricity investment in Canada to help meet the goal of a net zero electricity system by 2035. This credit, worth $7.3 billion over five years, will be available to Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and pension funds. Eligible projects will include:
- Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors);
- Abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035);
- Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and,
- Equipment for the transmission of electricity between provinces and territories.
To boost critical mineral mining, the government announced a refundable tax credit equal to 30 percent of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies, and extract, process, or recycle key critical minerals. This is worth $4.5 billion over 5 years.
As signaled in the fall economic statement, the government is creating a new
Clean Hydrogen Investment Tax Credit to support between 15 and 40 percent of eligible project costs, with the projects that produce the cleanest hydrogen receiving the highest levels of support. This new program will also extend a 15 percent tax credit to equipment needed to convert hydrogen into ammonia, in order to transport hydrogen to overseas markets. This new program will cost $5.5 billion over 5 years.
The government is also boosting their flagship Strategic Innovation Fund by $500 million over ten years to support the development and application of clean technologies in Canada, and directing up to $1.5 billion of its existing resources towards projects in sectors including clean technologies, critical minerals, and industrial transformation.
For the oilsands sector who are planning a major investment in Carbon Capture, Utilization and Storage (CCUS) infrastructure, the government will consult on the development of a broad-based approach to carbon contracts for difference that aims to make carbon pricing even more predictable. This will allow companies to lock in the terms under the current government to bind future governments, creating greater predictability required to unlock major investments.
Interestingly, the federal budget expands the eligibility of the Investment Tax Credit for Carbon Capture, Utilization, and Storage to projects that would store CO2 using dedicated geological storage in British Columbia, in addition to Alberta and Saskatchewan as previously announced. This could have significant impacts for natural gas production.
It worth noting a significant new investment in forestry supports, with $368.4 million over three years, starting in 2023-24, to renew and update forest sector support, including for research and development, Indigenous and international leadership, and data.
Health and Dental Care
The largest new investment in the federal budget is the top item on the NDP’s wishlist:
$13.0 billion over five years, starting in 2023-24, and $4.4 billion ongoing, to implement the new Canadian Dental Care Plan. The plan will 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.
As previously announced in February, the federal budget contains $46.2 billion in new funding over 10 years through new Canada Health Transfer measures, tailored bilateral agreements to meet the health care needs of each province and territory, personal support worker wage support, and a Territorial Health Investment Fund.
In addition, to encourage more doctors and nurses to work in rural communities, the government will spend $45.9 million over four years, starting in 2024-25, to expand the reach of the Canada Student Loan Forgiveness program to more rural communities, including all communities with populations of 30,000 or fewer.
Mental Health and Addictions
The government is doubling down on its evidence-based approach to fighting the opioid crisis via safe supply, in marked contrast to the position taken by Pierre Poilievre, with $359.2 million over five years to support a renewed Canadian Drugs and Substances Strategy. This includes:
- $144 million for the Substance Use and Addictions Program to fund community-based supports,
- $20.2 million to the Public Health Agency of Canada for a new community-based program to prevent substance use among young people, and
- $73.9 million to Health Canada to streamline authorizations for supervised consumption sites and drug checking services and to scale-up access to safer supply.
Starting in November 30, 2023, Canadians will be able to call or text 988 at any time to access quality, effective, and immediate suicide prevention and mental health crisis support. The government is spending $158.4 million over three years, starting in 2023-24, to the Public Health Agency of Canada to support the implementation and operation of 988.
The government is also providing $16.7 million over five years, starting in 2023-24, to Public Safety Canada to support the Canadian Institute for Public Safety Research and Treatment, who are making cognitive behavioral therapy available to public safety personnel in Quebec, Saskatchewan and the Maritime provinces.
Cost of Living
The government is offering a six-month extension of the GST rebate, which has been rebranded as a “Grocery Rebate” in recognition of the high cost of food, providing $2.5 billion in targeted inflation relief. An eligible single person with no children would receive a one-time payment of up to $234, a couple with two children would get up to $467 and a senior citizen could receive about $225. To accelerate the availability of this relief, a stand-alone bill will be introduced in the Commons to allow the GST measure to be debated and possibly passed quickly, separately from the larger federal budget implementation bill.
The government also announced several additional measures to reduce the cost of living for Canadians:
- The government will work with regulatory agencies, provinces, and territories to reduce “junk fees” for Canadians. This could include higher telecom roaming charges, event and concert fees, excessive baggage fees, and unjustified shipping and freight fees.
- The federal budget proposes to introduce changes to the Criminal Code to lower the criminal rate of interest from the equivalent of 47 percent to 35 percent.
- The government will implement a right to repair, with the aim of introducing a targeted framework for home appliances and electronics in 2024, and explore implementing a standard charging port in Canada, with the aim of lowering costs for Canadians and reducing electronic waste.
- To ensure more low-income Canadians have the ability to quickly and easily auto-file their tax returns, the government will increase number of eligible Canadians to two million by 2025—almost triple the current number. The government will also pilot a new automatic filing service that will help vulnerable Canadians who currently do not file their taxes receive the benefits to which they are entitled.
In a federal budget with little new funding to address the housing crisis across Canada, the government has made an important exception for Indigenous Canadians, with a significant investment of $4 billion over seven years, starting in 2024-25, to implement an Urban, Rural, and Northern Indigenous Housing Strategy, currently under co-development with Indigenous partners.
The government is providing $810.6 million over five years, beginning in 2023-24, to support medical travel and to maintain medically necessary services through the Non-Insured Health Benefits Program, including mental health services, dental and vision care, and medications.
Budget 2023 proposes to provide $171 million in 2022-23 to Indigenous Services Canada to ensure First Nations children continue to receive the support they need through Jordan’s Principle.
The government is also providing $95.8 million over five years, starting in 2023-24, and $20.4 million ongoing, to help Indigenous families access information about their missing and murdered loved ones, and to enhance victim services to support their healing journeys.
Equity, Diversity and Inclusion
The Liberals found room in a tight fiscal framework to provide support to several equity seeking groups within their voter coalition, including:
- $160 million over three years, starting in 2023-24, for the Women’s Program to provide funding to organizations in Canada that serve women.
- Amendments to the Canada Labour Code for new stand-alone leave for workers federally regulated sectors who experience a pregnancy loss, and for parents planning to have a child through adoption or surrogacy.
- $24.5 million over five years, starting in 2023-24, for the Department of Canadian Heritage to double funding for the Court Challenges Program. This program is administered independently and provides support for legal cases of national significance that clarify and assert official language rights and human rights.
- $25.4 million over five years, starting in 2023-24, to continue to support Canada’s Anti-Racism Strategy and fight all forms of racism, including but not limited to anti-Indigenous racism, anti-Black racism, anti-Asian racism, antisemitism, Islamophobia.
- $25 million, in 2024-25, for the Supporting Black Canadian Communities Initiative, to continue empowering Black-led and Black-serving community organizations and the work they do to promote inclusiveness.
- $10 million over two years, beginning in 2023-24, to Employment and Social Development Canada to help address the unique needs and ongoing barriers faced by persons with disabilities by investing in capacity building and the community-level work of Canada’s disability organizations.
Students remain an important constituency for the Liberals, who are building on past measures to support post-secondary education with:
- $813.6 million in 2023-24 to enhance student financial assistance, including increasing Canada Student Grants by 40 percent—providing up to $4,200 for full-time student, raising the interest-free Canada Student Loan limit from $210 to $300 per week of study.
- Increase limits on certain RESP withdrawals from $5,000 to $8,000 for full-time students, and from $2,500 to $4,000 for part-time students.
- Provide $197.7 million in 2024-25 to the Student Work Placement Program to continue creating quality work integrated learning opportunities for students through partnerships between employers and post-secondary education institutions.
- $108.6 million over three years, starting in 2023-24, to expand the College and Community Innovation Program, administered by the Natural Sciences and Engineering Research Council
Savings & Tax Increases
To offset this new spending, the Liberals have found $15.4 billion in savings over the next five years, by:
- Reducing spending on consulting, other professional services, and travel by roughly 15 per cent of planned 2023-24 discretionary spending in these areas.
- Phasing in a roughly 3 per cent reduction of eligible spending by departments, agencies and Crown corporations
- Legislative amendments to raise the AMT rate from 15 per cent to 20.5 per cent and further limit the excessive use of tax preferences. These amendments would generate an estimated $3.0 billion in revenues over five years, beginning in the 2024 taxation year.
The government has also established new taxes for high income Canadians and corporations, including:
- A two per cent tax on share buybacks by public corporations in Canada, which would apply as of January 1, 2024 to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada. A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million. It is estimated that this measure would increase federal revenues by $2.5 billion over five years, and “encourage firms to re-invest in their workers and businesses.”
- This federal budget proposes legislative amendments to raise the Alternative Minimum Tax (AMT) rate from 15 per cent to 20.5 per cent and further limit the excessive use of tax preferences. These amendments would generate an estimated $3.0 billion in revenues over five years, beginning in the 2024 taxation year. Under the proposed reforms, the basic AMT exemption would increase more than fourfold, from $40,000 to $173,000, significantly increasing the income level necessary to pay the AMT. This would result in a tax cut for tens of thousands of middle-class Canadians, while the AMT will more precisely target the very wealthy. Under these reforms, more than 99 per cent of the AMT paid by individual Canadians would be paid by those who earn more than $300,000 per year, and about 80 per cent of the AMT paid would be by those who earn more than $1 million per year.
Political bottom line
NDP Leader Jagmeet Singh was first to microphone to say that he would support the federal budget thanks to the inclusion of dental care, the GST tax credit, and the connection of clean economy investments to higher wages.
This federal budget represents the political pay-off from the Liberals to the NDP for propping up their minority government. It comes at a time when the Liberals are especially vulnerable, as the greatest threat to any government isn’t the scandal of the day – but the pain of a recession.
By bridging the Liberal government over a recession, the NDP is offering the Liberals a chance to wage the next election, whether in 2024 or 2025, in much rosier economic circumstances. It also gives the government more time to implement their climate change and Indigenous reconciliation agendas – both key points of differentiation with the Conservative opposition.
In the meantime, the Conservatives will heap scorn on the Liberal government for spending its way through a recession while Canadians feel the pinch in their wallets.
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