2018 Federal Budget

The Top Line

Late this afternoon, the Liberal Government tabled the 2018-19 Federal Budget.  The broad themes – science and economic innovation, Indigenous services, tax benefits targeted at middle class workers and their families, and gender equality – will be familiar to anyone who has followed the Liberal Party’s brand and policy priorities since Election 2015.  The guiding principle for the Liberals’ fiscal policy continues to be a belief that government deficit spending – even during a time of accelerating global economic growth – can and should be used to bolster the economy and quality of life.

Many of the new spending initiatives announced in Budget 2018 are targeted at bolstering social services and reinforcing the progressive policy image that the Trudeau-led Government seeks to own.  The Government is aware of the growing impatience with the pace of investment in key areas, such as transportation and community infrastructure and Indigenous services.  Budget 2018 seeks to address that dynamic by pouring significant new funding into infrastructure and services for Indigenous communities, while also allocating increased spending to scientific research and facilities and government benefits for families and the working poor.

Another key aspect of the Budget was a focus on gender-based analysis in developing fiscal policy.  While a similar analysis was also conducted for Budget 2017, this year the process was much more extensive and outcomes-focused.  Key proposed initiatives, amongst the many stemming from the gender analysis, include a commitment to table pay equity legislation in one of the 2018 Budget Implementation Acts and, beginning in June 2019, the introduction of an EI Parental Sharing Benefit – available only to parents that split their parental leave.

Budget 2018 reflects the Liberals’ willingness to have high government spending in the long term, but there is little new revenue in the Budget for the coming fiscal year – so most newly-proposed initiatives will draw on reallocated funds or dollars freed up from policy areas that were not a focus for this fiscal plan.  Notably, for example, with Phase II of the Liberal Infrastructure Plan now nearing implementation, Budget 2018 places less emphasis on public infrastructure spending.

Finally, Budget 2018 represents a pivot point from the Government executing on outstanding policy proposals from the Liberal Party’s 2015 platform towards a focus on initiatives that could form the basis of its 2019 platform.  Based on today’s Budget, the Liberals intend to run a re-election campaign that argues for an important government role in creating and supporting the social safety net, building a strong and dynamic economy via funding for science and infrastructure, and the importance of leveraging government policies to promote gender equality.

Fiscal Overview

The fiscal plan laid out in Budget 2018 is broadly similar to that planned in the 2017 Fall Fiscal Update.  Budget 2018 has a six-year fiscal projection window, during which annual deficits are expected to be in the order of:

  • $19.4 billion in 2017-18
  • $18.1 billion in 2018-19
  • $17.5 billion in 2019-20
  • $16.9 billion in 2020-21
  • $13.8 billion in 2021-22
  • $12.3 billion in 2022-23

In Budget 2016, the Liberal government abandoned its 2015 campaign promise to run $10-billion deficits until 2019, and instead committed itself to a fiscal anchor of a reduction of the debt-to-GDP ratio over time.  Budget 2018 does project that the debt-to-GDP ratio will decline gradually to 28.4% in 2022-23

Budget Highlights

Science and Innovation

The key theme of Budget 2017 was innovation.  That budget proposed several new policies and program overhauls intended to create economic growth and job creation by increasing Canada’s capacity for innovation.  Subsequently, in the past year, the Government rolled out programs, like the Innovation Superclusters Initiative, which focused on the commercialization of innovation.  In contrast, Budget 2018 is largely concerned with Federal support for fundamental science, while positioning the importance of scientific research as a driver of innovation and the broader economy.

The Naylor report – the outcome of the Government’s long-gestating Fundamental Science Review – made sweeping recommendations for reforming and augmenting Federal spending on science.  In response, Budget 2018 proposes spending more than $1.7 billion over five years on the Federal granting councils (NSERC, CIHR, and SSHRC), research institutes, and the Canada Research Chairs program, plus another $1.3 billion over five years on investments in research infrastructure.  The latter envelope of funding includes allocations for both physical and digital research tools and facilities.  The Canada Foundation for Innovation will be endowed with $763 million over five years to fund scientific research tools and facilities, and will transition to permanent funding of $462 million annually by 2023-24.  Meanwhile, $572.5 million is allocated over five years to develop and implement a Digital Research Infrastructure Strategy, with the aim of using ‘big data’ in science and innovation.  Finally, the Federal Government itself will carve out a larger role in Canada’s science sector by building a series of new Federal laboratories and upgrading existing facilities.

Federal Taxes

Budget 2018 provides the final details of the Government’s plan to limit the financial benefits of holding passive savings in a corporation.  The measures contained in the Budget are much-adjusted versions of the draft changes to the taxation rules for Canadian-controlled private corporations (CCPCs) that the Government originally proposed in the summer of 2017.  Beginning in taxation years after 2018:

  • Corporations earning more than $50,000 of passive investment income per year will see the amount of their total income that is eligible for the small business tax rate diminish by five dollars for every dollar of passive income earned above $50,000 – reaching zero dollars at $150,000 of passive income; and
  • CCPCs will no longer be able to obtain refunds of taxes paid on investment income if they are also issuing dividends from income taxed at the general corporate rate.

The Government is also seeking to increase Federal revenues from corporate taxes and reduce tax evasion by augmenting the Tax Court of Canada’s budget and creating new reporting rules for trusts.

The Federal Government will potentially enjoy a new revenue stream beginning this year, once the excise duty framework for cannabis comes into effect when cannabis becomes legal for recreational use.  Federal revenue from those taxes will initially be capped at $100 million for each of the next two years, with any additional revenue transferred to the Provinces.  Meanwhile, Federal excise taxes on cigarettes will be increased.

Indigenous Services and Infrastructure

In late 2017, the Government appointed Jane Philpott as Indigenous Services Minister and kicked off an ambitious process to create an entirely new Department to oversee the Government’s disbursements to Indigenous communities.  Budget 2018 allocates $5 billion in additional funding to that Department for services for Indigenous children and families, including increased spending to end boil water advisories on reserves, skills training for Indigenous peoples, and health services in Indigenous communities.

Previously announced as part of the National Housing Strategy, the Federal Government is also working with Indigenous stakeholders to improve housing in their communities.  Budget 2018 outlines the parameters of that initiative, proposing an additional $600 million over three years to support housing on First Nations reserves, $400 million over 10 years to support an Inuit-led housing plan, and $500 million over 10 years to support a Métis Nation housing plan.

Minister Philpott’s challenge will be to translate that wealth of funding into an effective strategy that achieves and can demonstrate improved outcomes for Indigenous peoples over the medium and long term.

Environment

Over the last two budgets, the Government allocated significant funding to developing and implementing the Pan-Canadian Framework on Clean Growth and Climate Change, and associated measures to reduce pollution and greenhouse gas emissions.  With those programs now in place, including Federal funding for building green infrastructure and incentives for renewable technologies, the environment file occupies a comparatively smaller place in Budget 2018.

However, the Budget does plan for about $1 billion to be spent over five years in support of the new environmental impact assessment system and a Canadian Energy Regulator – proposals that are currently before Parliament – and to implement other Federal environmental oversight mechanisms.  There is also a $500 million allocation for a new $1 billion Nature Fund that will also draw on corporate, not-for-profit, and Provincial partners.

Tax Benefits and Wage Protection Support for the Middle Class

The 2017 Fall Economic Statement announced a plan to bolster the Working Income Tax Benefit (WITB) by $500 million.  Budget 2018 builds on that announcement by rebranding the WITB as the Canada Workers Benefit.  Increased payments under the Benefit will begin flowing in 2019.  Similarly, the Canada Child Benefit, a signature policy of the Liberal Party’s 2015 platform, will be indexed to inflation beginning in July 2018.

Building on those initiatives, the Government is also bolstering the Wage Earner Protection Program by increasing the maximum eligible amount of insurable earnings under the Program to seven weeks from four.  That measure, along with a pledge to begin consulting on stronger protections for pensions, indicate the Government’s appetite to address controversy that has stemmed from several major company bankruptcies in recent years and the hardship that caused workers and retirees.

Opposition Reaction

The criticism of the Budget from Conservative Party and Official Opposition Leader Andrew Scheer focused on messaging that will appeal to the Conservative base that is predisposed to dislike high deficit spending at a time of high economic growth – messaging that may speak to some swing voters as well.  Mr. Scheer accused the Government of tabling a wasteful, tax-and-spend Budget that does not do enough to support the natural resources industry or veterans, and that undermines the small business sector.

For NDP Leader Jagmeet Singh, the immediate and long-term response to Budget 2018 is about effectively opposing the Government’s policies in a way that increases his prominence in the Federal policy discussion.  Just prior to the Budget, the Liberals pulled the rug out from under Mr. Singh on pharmacare by beating the NDP to being the party that takes the first significant step to establishing a national pharmacare program.  But the Liberals will not have gone far enough in Budget 2018 on this and other issues for some voters.  Watch for Mr. Singh to appeal for the support of those people by laying down policy markers on free post-secondary tuition and even more investment in health services – such as public funding for dental care.

What Comes Next – An Eye on Election 2019

Budget 2018 continues the Liberal Party’s well-established game plan for economic policy.  Specifically, the Liberal Government continues to advance policies that prioritize Government spending to improve economic productivity (via innovation and infrastructure initiatives).  Meanwhile, the Government is also activist in nature on the social policy front, pursuing government programs and policies aimed at improving gender equality, the financial health of middle and lower middle-class families, and the circumstance of traditionally disadvantaged groups, such as Indigenous Canadians.

Unlike the Official Opposition Conservatives, the Liberals have demonstrated a willingness to engage in deficit spending – their fiscal anchor continues to be a declining debt-to-GDP ratio.  Like its Ontario Liberal cousins, the Federal Government feels most comfortable on the centre-left of the political spectrum.  The Party is eager to draw distinctions and differences between their approach to Government and the small government priorities of the Conservatives, while attempting to marginalize the NDP on the far left of national political debate.  The ultimate goal is to set those dynamics as the ballot question of Election 2019.

Exhibit A of that strategy is the announcement in Budget 2018 of the creation of an Advisory Council on the Implementation of National Pharmacare – a policy originally conceived and proposed by the NDP and long-opposed by Conservatives.  The Liberal-created Council, chaired by outgoing Ontario Health Minister Dr. Eric Hoskins, will make recommendations to the Federal Minister of Health and Finance on next steps for addressing prescription drug costs.