The Top Line
Finance Minister Chrystia Freeland’s second Fall Economic Statement (FES) was delivered in the House of Commons today as Canada faces significant economic headwinds. Inflation, which has been largely absent in Canada since the early 1990s, remains stubbornly high, while at the same time many economists are predicting Canada could be headed into a recession in early 2023, if not already. At the same time, households are staring at significantly increased costs of borrowing on their mortgages and debts.
These choppy waters have placed Canada’s economy and fiscal situation front and centre for the Minister. Today’s statement was designed to acknowledge and address the dual pressures of inflation and slowing growth while dampening expectations around new spending in Budget 2023.
In terms of the numbers behind the concerns, Finance Canada and private sector forecasts provided to the Minister suggest inflationary pressures and a potential economic downturn will be relatively short-lived. This is shown in its belief that the economy will be begin rebounding in 2024 and that inflation will return to levels closer to two to three per cent than the current six per cent and above.
The statement holds some significant announcements – especially in relation to climate – with technical details surrounding the new Canada Growth Fund and $250 million for training over five years to help workers in a changing economy. Other measures were strategic and micro-targeted to specific groups, with students receiving relief for interest on student loans and the Government seeking to respond to small business with an announcement on credit card transaction fees.
Key stakeholders will be asking if Canada has done enough to address inflation and avoid recession. Conservative Leader Pierre Poilievre can be expected to amplify messaging that the government is not doing enough. The government will expect this, but will look to the New Democrats for continued support under its Supply and Confidence Agreement. There is nothing in the FES that would suggest the NDP will not express its continued confidence in the government.
The key unknown coming from the FES is whether the government will maintain its course in Budget 2023. The answer at least partly rests on how much the Government’s fiscal projections change in four to five months’ time. Will the Government need to respond to continued economic headwinds or will it be able to continue on its preferred course of strategic spending on its priorities?
While today’s statement was designed to dampen expectations of significant new spending in the next Budget, we expect some Cabinet Ministers, caucus, stakeholders and the Liberals’ Supply and Confidence Agreement Partners – the NDP – to continue their lobbying for new spending in Budget 2023. How Minister Freeland and Prime Minister Trudeau respond to this will be a key focus in coming months.
Fiscal Snapshot
The government is expecting its budgetary balance will improve significantly after the spending devoted to propping up the economy during the pandemic. Budget 2022 had projected a deficit of $52.8 billion, which has now been lowered to $36.4 billion. The FES suggests the deficit will be as low as $3.4 billion in 2026-2027 and in surplus by 2027-2028. The improved fiscal situation is being driven largely by higher projected income tax revenues.
The government’s expectations for real GDP growth see any potential recession as being short-term. Its average of private sector forecasts predicts growth of just 0.7 per cent in 2023 (down from a Budget 2022 prediction of 3.1 per cent) before rebounding to 1.9 percent in 2024 and 2.3 per cent in 2025. This suggests the Government believes the measures it has taken and will take – including a focus on fiscal management – will see Canada through a short period of stagnant growth.
The FES also suggests inflation will drop to 3.5 per cent in 2024 and back to 2.1 per cent in 2024, 2025 and 2026, again suggesting government confidence the worst on the inflation front has passed.
FES Commitments
The FES included a number of significant announcements that fit within the Government’s strategic focus.
Climate
Budget 2022 had announced the creation of the Canada Growth Fund. Today’s FES provides greater detail on its design. The Fund will be focused on attracting private investment in Canadian businesses and projects that meet a number of national economic policy goals, including
- Reduce emissions and achieve Canada’s climate targets;
- Accelerate the deployment of key technologies, such as low-carbon hydrogen and carbon capture, utilization and storage (CCUS);
- Scale up companies that will create jobs, drive productivity and clean growth, and encourage the retention of intellectual property in Canada; and
- Capitalize on Canada’s abundance of natural resources and strengthen critical supply chains to secure Canada’s future economic and environmental well-being.
The Growth Fund will be launched before the end of 2022 and initially managed by the Canada Development Investment Corporation (CDEV), with a goal to setting up a permanent, independent structure in 2023.
Other climate focused investments include a refundable tax credit for investments in clean energy and proceeding with the Budget 2022 commitment to establish a tax credit to support investments in clean hydrogen production.
Housing Affordability
The FES announced the government will move to introduce a Tax-Free First Home Savings Account, which will allow prospective first-time home buyers to save up to $40,000 tax-free toward their first home. The Accounts should be able to be opened in mid-2023.
The government will also double the First-Time Home Buyers’ Tax Credit; introduce 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; and ensure that profits from flipping properties held for less than twelve months are fully taxed, starting in 2023.
Students
The FES announced that the government intends to make the federal portion of all Canada Student Loans and Canada Apprentice Loans permanently interest free, including those currently being repaid.
Training
The government has announced $250 million over five years to help workers in a changing economy. These include the creation of a Sustainable Jobs Training Centre, a sustainable jobs stream under the Union Training and Innovation Program and a Sustainable jobs secretariat.
Digitization of Money
Further to the government’s announcement in Budget 2022 that it would launch a financial sector legislative review focused on the digitalization of money and maintaining financial sector stability and security, the FES announce consultations with stakeholders on digital currencies, including cryptocurrencies, stablecoins, and central bank digital currencies.
Tax on Share Buybacks
The FES announced the government’s intention to introduce a corporate-level two per cent tax that will apply on the net value of all types of share buybacks by public corporations in Canada. Details will be announced in Budget 2023 and the tax will come into force on January 1, 2024.
International Tax Reform
The government used the FES to restate its commitment to ensuring multinational corporations pay their “fair share” of tax wherever they do business. Canada is working with the OECD on two pillars in this regard. The first is ensuring corporations, including digital ones, pay their fair share of tax in jurisdictions where their users and customers are located. The second would ensure multinational corporation are subject to a minimum effective tax rate of fifteen per cent on profits in every jurisdiction in which they operate.
What’s Next
The government has given notice that legislation to implement the FES and certain outstanding measures from Budget 2022 will be introduced on November 4, and the Government House said debate on that legislation will take place after the upcoming break week (on November 14, 2022).
Looking ahead, the Finance Committee will continue its pre-budget consultation and provide a report to the Minister. This will lead to Budget 2023, which we are currently expecting will be tabled in February or March. Impacting all of this will be the Bank of Canada, which will continue to monitor inflation and adjust interest rates as they feel is required. The next interest rate decision is scheduled for December 7, 2022.
On a longer-term basis, the Trudeau Government is seeking to strengthen its economic credentials and we will be watching closely how this impacts their support amongst voters and, perhaps more importantly, the supply and confidence agreement with the NDP. For now, we do not foresee an election in 2023. We do, however, see the potential for any continued economic turmoil to lead to the Liberal-NDP agreement being dissolved in 2024, thereby precipitating an election.
