2019 Federal Budget

The Top Line

Late this afternoon, the Government tabled Federal Budget 2019.

The Liberal Party’s fiscal policy continues to be guided by a belief that government deficit spending can and should be used to bolster the economy and quality of life. Budget 2019 opens with a summary of some of the Government’s accomplishments in that regard since 2015. Overall, the Budget’s emphasis on skills development, pharmacare, reconciliation and housing affordability will not be surprising to anyone who has followed the Liberal Party’s brand and policy priorities since Election 2015.

During the first three budget cycles of its mandate, however, the Government enjoyed an almost uniformly rosy economic context. Contrastingly, Budget 2019 comes on the heels of news that Canada’s inflation-adjusted GDP growth was a negligible 0.4% in the fourth quarter of 2018. Though private-sector economists expect GDP growth to pick up steam again throughout 2019 and unemployment is at a 40-year low, the Government will be worried about what impact a soft economy could have on the 2019 election campaign.

As such, it is no surprise that the Liberals chose to leverage higher-than-expected tax revenues from the last two fiscal years to propose new policies and programs that augment government support in areas such as lifelong education, income supplements and services for seniors and students, creating a national pharmacare system, and giving more people a foothold in the housing market.

A useful framework to understand the place of Budget 2019 in the Liberal Party’s strategic plan is to examine it as a thematic complement to the 2018 Fall Economic Statement. The Statement was entitled Investing in Middle Class Jobs, and it focused on business competitiveness measures, regulatory reform and creating an Export Diversification Strategy. Meanwhile, today’s Budget is entitled Investing in the Middle Class, and it primarily emphasizes measures to support individuals as workers and consumers. In essence, the Government used the 2018 Statement to lay the business-focused framework for its re-election narrative and Budget 2019 to address consumer issues – which are likely to be more top-of-mind during the coming campaign season.

Budget 2019 can be viewed as the informal start of the campaign period for Election 2019. The Liberal Party has struggled in recent public opinion polls during the fall-out from the SNC-Lavalin matter, and the Liberals are in a true dead heat for re-election.

That said, circumstances can change, and the Government will hope that Budget 2019 accomplishes just that. Notably, many of the new policies and spending initiatives proposed in the Budget are timed to be funded or become operational in the coming months. That will set up an election narrative whereby the Liberals can contrast their new benefits and spending with a Conservative platform that will likely focus on tax cuts and scaling back the role of Government.

Fiscal Overview

The fiscal plan laid out in Budget 2019 is broadly in line with the projections found in the 2018 Fall Fiscal Update. Budget 2019 has a six-year fiscal horizon, during which:

  • GDP is projected to grow by 1.8% 2019 and 1.6% 2020, before increasing in subsequent years;
  • The Government will run deficits of $19.8 billion in 2019-20 and $19.7 billion in 2020-21, before those figures decrease somewhat in subsequent years; and
  • The debt-to-GDP ratio will be reduced annually over the entire fiscal horizon.

The Government collected higher-than-expected tax revenues over the last two fiscal years and expects that to continue. Some of those funds were leveraged for the policy and program highlights detailed below.

Budget Highlights

Skills and Innovation

The Trudeau government has long been seized by the risk of job losses due to automization, the shortage of relevant skills training to support the exploding demand for high-tech jobs, and creating the right conditions for Canada to be a global tech leader. Those considerations were at the heart of the ‘Innovation Budget’ in 2017 and drove the development of such keystone policies as the Strategic Innovation Fund and the Innovation Superclusters.

While those programs aimed to overhaul government support for innovation and foster private sector high-tech investment in Canada, Budget 2019 shifts the focus to individual-level skills training.

The central policy proposal in that regard is the Canada Training Benefit. Half of the Benefit will be personalized credit accounts that individuals will be able to draw on to subsidize skills training and education as of 2020. Funded by $710 million over five years, the accounts will accumulate money to workers between the ages of 25 and 64 who earn between $10,000 and $150,000 per year, increasing by $250 per year, up to a lifetime limit of $5,000. A linked EI Benefit, funded by $1.04 billion over five years starting in 2019-20, will provide up to four weeks of income support every four years for workers to take time off during training. The Government will consult with the provinces and territories on changing labour legislation to ensure that workers can access the benefit without risk to their employment.

To support businesses and hiring, Budget 2019 proposes to make the Global Talent Stream (a pilot program inaugurated in Budget 2016) permanent and to eliminate the business income threshold for accessing the 35% refundable credit under the Scientific Research and Experimental Development Tax Incentive Program.

The Budget also proposes to establish a Strategic Science Fund, starting in 2022-23, to act as a one-stop-shop for government support of third-party science and research.

Federal Regulatory Reform

Budget 2019 introduces the first of three planned ‘Regulatory Roadmaps’ to create more user-friendly and simpler Federal regulations. Initial funding will target the Canadian Food Inspection Agency, Health Canada and Transport Canada.

Federal Taxes and Income Supports

The Government used the Budget to announce plans to limit the use of employee stock options, to align stock option policy with the United States and to prevent the use of derivative transactions to shelter taxable income. Concurrently, the Government will continue its years-long strategy to improve tax compliance, discourage the use of corporate beneficial ownership structures and to reduce money laundering in Canada.

Due to the recent legalization of cannabis, the Government has enjoyed a new tax stream this fiscal year. Budget 2019 proposes amendments to better apply the excise duty framework for cannabis products to cannabis oils, extracts and edibles. As Canada adapts to legal cannabis, stakeholders should expect continued adjustments to the excise duty and points of sale laws.

On consumer finances, the Government will support low-income seniors by enhancing the Guaranteed Income Supplement as of July 2020 and eliminating barriers to seniors taking on part-time employment while collecting the Supplement. The Government will also introduce legislation to protect workplace pensions during corporate insolvencies.

Pharmacare

Budget 2018 created an Advisory Council on the Implementation of National Pharmacare, formed to recommend next steps for addressing high prescription drug costs to the Federal Ministers of Health and Finance. In Budget 2019, the Government proposes to work with the provinces and stakeholders to create the Canadian Drug Agency – a central body to carry out drug evaluation and price negotiation on behalf of Canadians and their drug plan providers. Funding for the Agency will flow as of 2019-20 and the Government will also invest $1 billion over two years, as of 2022-23, to help Canadians with rare diseases get access to drugs.

Stakeholders should expect Pharmacare to be a key issue in Election 2019, especially as a wedge issue between the Liberals and the NDP, both of whom will fight for progressive voters in part on this issue. The Advisory Council will submit its final report this summer, and its content will inform the Liberal Party campaign platform.

Affordable Housing

Budget 2019 notes that one in eight households cannot find affordable housing. The Government is particularly concerned that many young Canadians are unable to buy homes. Given that millennials will be a key voting block for Election 2019, the Government’s preoccupation with supporting home ownership is to be expected.

To address the issue, Budget 2019 introduces a First-Time Home Buyer Incentive – a ‘shared equity mortgage’ that will give first-time home buyers with a household income under $120,000 per year the option to augment their down payment with a contribution from the Canadian Mortgage and Housing Corporation (CMHC), thereby reducing their monthly mortgage fees. Funded with an allocation of $1.25 billion over three years, the Incentive is planned to be operational by September of this year, coinciding with the Election 2019 campaign. First-time home buyers will also benefit from an increased maximum RRSP withdrawal under the Home Buyers’ Plan – augmented to $35,000 from $25,000.

On the supply side of the housing equation, Budget 2019 allocates an additional $10 billion over nine years to the Rental Construction Financing Initiative, extending the program until 2027-28. The Budget also sets aside $300 million for a new Housing Supply Challenge – a program inviting municipalities and stakeholders to propose new ways of fostering housing construction. Infrastructure Canada and the CMHC will provide more details on the policy by summer 2019 – again setting up a program rollout to overlap with Election 2019.

Meanwhile, Budget 2019 also promises continued implementation of the National Housing Strategy, and the Government will pass legislation this year to require that all future governments have such a strategy.

Infrastructure

Budget 2019 includes a comprehensive review of the Investing in Canada Plan, detailing the infrastructure projects funded and making a case for associated economic benefits. Stakeholders should expect a narrative about the national and community-level benefits of the Plan – e.g. highways paved and bridges built – to be prominent in the Liberal Party’s election messaging

Looking forward, Budget 2019 makes a one-time transfer of $2.2 billion through the federal Gas Tax Fund to municipalities and First Nations for short-term infrastructure priorities. The Government is also proposing a $6 billion plan to achieve near-universal internet connectivity in Canada over the next 10 years by making investments in everything from Low Earth Orbit satellite capability to ‘last-mile’ connections at the community level.

Environment

In prior budgets, the Government allocated significant funding to developing and implementing the Pan-Canadian Framework on Clean Growth and Climate Change, most notably a Federal carbon pollution pricing system. Today, the Government released a backgrounder seeking stakeholder comment on refinements to the carbon pricing system, including proposals for expanded relief on fuel charges for farmers and certain types of fuel.

Meanwhile, Budget 2019 allocates $1.01 billion in 2018-19 to increase residential and commercial energy efficiency and specifies that the Canada Infrastructure Bank will prioritize clean hydroelectricity and electrical connectivity infrastructure projects moving forward.

Notably for the natural resources development sector, the Government used the Budget to announce plans to develop a self-review report and plan to potentially reform subsidies for fossil fuel development – pursuant to Canada’s G20 commitments on the topic.

Opposition Reaction

Criticism of the budget from Conservative Party and Official Opposition Leader Andrew Scheer focused on messaging that will appeal to the Conservative base, predisposed to dislike high deficit spending of any kind, and which may speak to some swing voters as well. Referencing the SNC-Lavalin issue, Mr. Scheer said the budget consists of “big deficits to cover up corruption before the election and big tax hikes to pay for them after.”

For the NDP, making the case that the Liberal government did not go far enough in supporting public services and that the NDP could do better for consumers is the central message. NDP Leader Jagmeet Singh said: “This budget shows how disconnected Trudeau’s Liberals are from Canadians’ everyday reality… there is no sense of urgency to act on skyrocketing housing costs, unaffordable childcare, expensive prescription drug costs, and senior poverty rates.”

What Comes Next – An Eye on Election 2019

Many of the new spending initiatives announced in Budget 2019 are targeted at bolstering social services and reinforcing the progressive policy image that the Trudeau government seeks to own. That will prove an important element of Election 2019, since, to win, the Liberals must be perceived as the best progressive option while convincing voters that a progressive government is preferable to a return to conservativism.

Notably, however, unless a Budget 2019 measure is included in the first Budget Implementation Act, which would have to be passed by June, the measure would not be law before the fall election. As such, many of the commitments in Budget 2019 are essentially conditional on the Liberal government getting re-elected in October, while a different winner could take a new policy direction.