Insights from Counsel’s Federal Team by John Delacourt and Ben Parsons:
The Fall Economic Statement – or FES, as it’s called in the Ottawa bubble – is an annual opportunity for the Finance Minister to update Parliament on major changes to the nation’s fiscal health, engage in budgetary housekeeping and introduce a few policy initiatives that cannot wait until next spring.
As our economy weathered the worst of the pandemic, the last two statements have taken on added significance, as the government and the Bank of Canada have attempted to absorb numerous shocks to stability on the pot-holed road back to economic growth. This statement is no different, as it seeks to reassure Canadians that the government has a plan to keep the economy out of recession and address the rising cost of living.
FISCAL AND ECONOMIC PICTURE
Canada’s fiscal picture has changed significantly since the federal budget was introduced last April. The uncertainty in the economy has led the government to project two different economic scenarios – a “baseline” scenario, and a grimmer “downside” scenario. Using this approach, the government is preparing Canadians for the possibility of a “hard landing,” where the Bank of Canada’s drive to curb inflation via higher interest rates tips the economy into recession.
First, the good news. High commodity prices and low unemployment have reduced the estimated federal deficit to less than half of the $53 billion projected last spring. Finance Canada’s new baseline scenario projects a $4.5-billion surplus by 2027-28, while the downside scenario projects a $8.3 billion deficit by that time.
Now for the bad news. The Bank of Canada’s interest rate hikes over the past eight months are intended to reduce the amount of money that households and businesses have for discretionary spending, which should in turn reduce aggregate demand. In theory, this should drive down the rate of inflation. This approach is a blunt, painful instrument that no central bank enjoys using – because it could cause a recession. The Trudeau government is acutely aware that Canadians are looking for a way out of this morass, with the threat of seventies-era “stagflation” (low economic growth paired with high inflation) looming. The FES projects 0.7% GDP growth in 2023 under the baseline scenario – but under the downside scenario, a recessionary 0.9% decline in GDP.
COST OF LIVING
Inflation is easing somewhat, but remains stubbornly high, while the Bank of Canada continues to ratchet up the lending rate. These interest rate hikes, while cooling activity in the red-hot housing market, are driving up costs for mortgage holders, further aggravating the affordability crisis. The increasing size of mortgage payments, along with more expensive groceries, home heating and fuel prices are driving consumer anxiety throughout the economy. In the Fall Economic Statement, the Liberals have included a variety of targeted measures intended to ameliorate some of the more painful effects of inflation. They include:
- Making all Canada Student Loans and Canada Apprentice Loans permanently interest-free, including those currently being repaid, beginning on April 1, 2023. This change has an estimated cost of $2.7 billion over five years and $556.3 million ongoing. This measure will be enormously popular with the coveted youth voter demographic.
- Along with previously announced housing measures, the Liberal government is introducing a new, refundable Multigenerational Home Renovation Tax Credit, which would provide up to $7,500 in support for constructing a secondary suite for a family member who is a senior or an adult with a disability, starting January 1, 2023.
- Delivering on Dental Care, a key commitment in the Liberal-NDP Confidence and Supply Agreement. For those without dental coverage and with an annual family income under $90,000 per year, the Canada Dental Benefit will provide payments of up to $650 per year, over the next two years. This is a bridge program that is expected to be replaced with a more permanent dental care plan.
TAKING AIM AT CORPORATE CANADA
As inflation has increased, the government has also harnessed some of the anger that Canadians feel towards record high corporate profits, via two significant new measures:
- Introducing a corporate-level 2 per cent tax that would apply on the net value of all types of share buybacks by public corporations in Canada. This new tax will be enacted in 2024 and will raise $2.1 billion over five years.
- New negotiations with payment card networks, financial institutions, acquirers, payment processors, and businesses to lower credit card transaction fees for small businesses.
In January of this year, U.S. Treasury Secretary Janet Yellen laid out the economic roadmap the Biden administration was taking as “modern supply side economics,” which seeks to “spur economic growth by boosting labor supply and productivity, while reducing inequality and environmental damage… aiming for growth that is inclusive and green.” Just six months later, Freeland and Yellen, in a joint press conference, all but affirmed their strategic alliance in crafting a narrative from economic recovery to growth. In many ways, the FES confirms that modern supply side economics has become Canada’s roadmap as well.
Minister Freeland also brought forward some significant new measures to compete with the United States’ decarbonization efforts enacted in President Biden’s Inflation Reduction Act.. These include:
- An enhanced clean technology tax credit to cover 20 to 30 per cent of capital investments, available starting on the date of budget 2023. This credit will be more generous depending on the proportion of high wage workers employed by a company or project. The credit will cover clean electricity projects including solar, wind, small modular nuclear reactors and small hydro, electricity storage, heat pumps, Industrial zero-emission vehicles and related charging or refueling equipment, such as hydrogen or electric heavy-duty equipment used in mining or construction. This tax credit is expected to cost $6.7 billion over five years, starting in 2023-24.
- A new tax credit for hydrogen production, based on the lifecycle carbon intensity of hydrogen, available starting on the date of budget 2023.
- Launching the Canada Growth Fund by the end of 2022. The Canada Growth Fund will be a financial solution provider that will use a flexible suite of investment tools, including concessional loans and contracts for difference. Contracts for difference provide a more predictable environment for decision making about long-term investments by reducing price and other risks. The Growth Fund will help attract the billions of dollars in new private capital required to fight climate change, including by accelerating the deployment of key technologies, such as low-carbon hydrogen and carbon capture, utilization, and storage (CCUS)
SPEEDING UP MAJOR PROJECTS
In Minister Freeland’s Brookings Institution speech last month, she addressed the need for “friendshoring” and fast-tracking projects that benefit our allies in a world changed by Russia’s attack on Ukraine and China’s more aggressive posture. In the Fall Economic Statement, we got a glimpse of what Freeland meant with this commitment:
- Canada will provide up to $1.28 billion over six years, starting in 2022-23 to the Impact Assessment Agency of Canada, the Canada Energy Regulator, and the Canadian Nuclear Safety Commission, and other federal departments. This funding will ensure agencies designed to protect our environment can increase their capacity and improve the efficiency of assessments to respond to a growing number of major projects being proposed.
- Work is underway to develop a national benefits-sharing framework, in partnership with Indigenous communities, to ensure that First Nations and Métis communities can directly benefit from major resource projects in their territories. Further details will be provided in 2023 on this measure which will help to secure Indigenous support for new projects.
JUST TRANSITION – UNDER ANOTHER NAME
The FES includes $250 million for several “Sustainable Jobs” initiatives – which sounds a lot like the Just Transition strategy. The hallmark announcement is a new Sustainable Jobs Training Centre, to bring together workers, unions, employers, and training institutions across the country to examine the skills of the labour force today, forecast future skills requirements, and develop curriculum, micro-credentials, and on-site learning to help 15,000 workers upgrade or gain new skills for jobs in a low-carbon economy. The Centre would focus on specific areas in high demand, starting with the sustainable battery industry and low-carbon building and retrofits.
The Trudeau Liberals have been stung by criticism over long passport lines, border delays, student visa backlogs, and delayed Employment Insurance and Old Age Security claims. The government is responding by investing $2.2 billion over five years to reduce these backlogs – presumably to hire new government employees to speed up these processes.
THE OPPOSITION’S RESPONSE
Tomorrow, Opposition Leader Pierre Poilievre will deliver a detailed response to the Fall Economic Statement in a speech for the Empire Club in Toronto. He gave a preview of what we will hear by stating, today, that “the cost of government has driven up the cost of living” for Canadians. We will be watching his speech tomorrow to see if it hearkens back to an earlier iteration of supply side economics from the last century, or if it charts a different path for growth and prosperity. But rest assured, with a potential recession looming and a new tone of austerity sounded, the contrast is likely to be stark and sharply defined – and primed for the next federal election campaign, likely to occur in 2024.
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