Finance Minister Chrystia Freeland tabled her fall economic statement Thursday — a multi-billion dollar plan that calls for more spending even as the economy stands on the brink of a recession, with interest rates set to move still higher.
While Freeland has promised fiscal prudence in this era of sky-high inflation, the mini-budget proposes new programs to help some of the people hit hardest by rising prices — including students and low-income workers — and to launch what she called “a real, robust industrial policy” to position Canada for future economic growth.
Freeland announced that all federal student and apprenticeship loans will be interest free permanently and unveiled a multi-billion dollar plan to automatically send Canada Workers Benefit (CWB) payments to people who qualified in the previous tax year.
The document also includes a plan to match some of the clean-energy incentives recently introduced in the United States through the US Inflation Reduction Act, which the government sees as a threat to future investment in Canada.
The upshot: $30.6 billion in new spending over the next six years.
The government’s current fiscal health is much better than expected thanks to higher oil prices and growth in personal and corporate taxes.
Freeland told the House of Commons Thursday that improvement in the federal fiscal picture “didn’t happen by accident.”
“It happened because people struggled through COVID, they kept their businesses going, they kept working and operating,” she said. “And that’s why Canada is in this pretty remarkable position of significantly outperforming our forecasts in the budget in April.”
Freeland’s spring budget projected a deficit of $52.8 billion for the 2022-23 fiscal year. Now, the fall economic statement is forecasting a deficit of $36.4 billion.
That’s still a lot higher than the $23 billion deficit Ottawa could have posted had it saved more of its financial windfall instead of earmarking it for new programs.
Asked if it was appropriate to spend some of the newfound revenue with the economy in a precarious state, Freeland said the government has “chosen to invest that upside.”
The government is juggling two goals, Freeland said: it wants to avoid stoking inflation while also supporting people hit hard by the rising cost of living.
“We need to strike a balance today between, on the one hand, being fiscally responsible, keeping our powder dry, given the global economic uncertainty and, on the other hand, being compassionate, providing support to those people who need it,” Freeland told reporters.
There’s a risk that $36.4 billion deficit projection might never materialize. The deficit could end up much worse — because the economy is on shakey ground.
The government fears the economy could slip into a recession next year as the Bank of Canada’s aggressive interest rate hikes substantially slow a once red-hot economy.
Private sector economists surveyed by Ottawa are projecting real GDP growth at just above zero for the next several quarters. That would push Canada’s unemployment rate up from the current 5.2 per cent to 6.3 per cent by the end of next year.
The federal government presented what it called a “downside scenario” for growth and employment — one in which a recession results in thousands of lost jobs, fewer taxes collected, a spike in employment insurance (EI) payments, an increase in debt servicing costs and a dramatically higher deficit: $49.1 billion in 2022-23.
‘Our economy is slowing down’
This “downside scenario” is not out of the realm of possibility, the government said. In fact, Freeland’s department said Thursday “the balance of risks to the growth outlook are tilted to the downside.”
“This is a challenging time for millions of Canadians. It’s important that I’m honest with Canadians about the challenges that lie ahead,” Freeland said in a speech Thursday.
“Interest rates are rising as the central bank steps in to tackle inflation. That means our economy is slowing down.”
Conservative Leader Pierre Poilievre blasted Prime Minister Justin Trudeau over the fiscal document, accusing him of engaging in “a massive orgy of money-printing.”
Speaking in the Commons, Poilievre said it was federal government spending that fueled inflation, driving up the cost of everyday goods. The government maintains the pandemic, supply chain disruptions and the war in Ukraine are to blame for price increases.
Poilievre said Freeland’s “inflationary scheme,” which proposes $6.1 billion more in spending for this fiscal year alone, will only make matters worse.
“Insanity is doing the same thing over and over again and expecting different results. Stop the insanity, stop the inflation,” said Poilievre, who did not make himself available to answer reporters’ questions afterward.
He said that a government led by him would introduce a “pay as you go” law, which would force the federal government to offset every dollar of new spending with cuts elsewhere.
“We’re going to inherit this mess. We’re going to have to fix the problem. We’ll have a big job ahead of us, a very big job. He’ll leave a big mess just like his dad left. He’ll be off on a beach somewhere surfing,” Poilievre said of Trudeau.
‘A lot of uncertainty’
A senior government official who spoke to reporters on background Thursday said there is “undeniably a lot of uncertainty. We’re also seeing volatility” in the economy.
With the US Federal Reserve and the Bank of Canada determined to bring down inflation through higher rates, the official said, Ottawa is now expecting a “relatively shallow, relatively short recession” over three quarters in 2023.
The official also said the country is relatively well-positioned for a slowdown because labor markets are tight — which should keep the unemployment level lower than it was during the 2008-09 economic crisis — and higher commodity prices are generally “good for the Canadian economy” “
To help the poorest Canadians cope with inflation pressure, Freeland announced the government will rework the current CWB, a refundable tax credit that tops up the incomes of about 3 million workers.
The government says it will spend $4 billion over the next six years to automatically issue what it’s calling “advance payments” to those eligible for the CWB; recipients won’t have to wait for tax time to collect all of what they’re owed.
Workers qualify for the benefit based on their income from the previous tax year. The benefit will provide up to $714 for single workers and $1,231 for a family.
The change to the CWB comes on top of other measures Ottawa recently rolled out for low-income Canadians: a doubling of the GST credit for six months, a top-up to the Canada Housing Benefit and a plan to cover dental expenses for low- income kids under 12.
Student loans going interest-free
To help students, Freeland announced the government will make all Canada Student Loans and Canada Apprentice Loans permanently interest-free — including those currently being repaid.
This $2.7 billion program is expected to save the average student loan borrower $410 a year.
The government also has earmarked another $802.1 million in spending over the next three years for a “youth employment and skills strategy” that will include some 70,000 annual summer job placements.
On the housing file, the government promised Thursday to table legislation soon to implement the long-promised “tax-free first home savings account,” an initiative that was first pitched in the spring budget.
This program combines features of RRSPs and TFSAs. Money added to a tax-free first home savings account would go in tax-free and could be withdrawn without any taxes owing on investment gains.
The government expects eligible Canadians will be able to open such accounts in mid-2023.
To help offset the closing costs associated with the purchase of a home, the government is doubling the first-time home buyers’ tax credit to $10,000.
This enhanced credit will provide up to $1,500 in direct support and will apply to homes purchased on or after Jan. 1, 2022.
Playing catch-up on a net-zero economy
The government is concerned about the Inflation Reduction Act, a landmark piece of legislation that recently cleared the US Congress.
That bill will unleash hundreds of billions of dollars in US federal spending to jump-start the transition to a cleaner economy south of the border.
“It is a game-changer for climate transition but it’s also a game-changer for the rebuilding of the industrial structure of America for the next generation,” said the senior government official.
“It’s going to make the US a global leader in batteries, carbon capture, hydrogen, clean fuels, and it will attract foreign direct investment. It’s a gravitational black hole for capital spending.”
To keep pace with the US, Ottawa is rolling out two new tax credits meant to spur investment in Canada.
The first is a refundable tax credit equal to 30 per cent of the capital cost of investments in clean energy technology such as solar, small modular nuclear reactors, wind and hydro and wave and tidal power projects.
The tax credit will also apply to electricity storage systems, low-carbon heat equipment like air-source heat pumps, and industrial zero-emission vehicles.
The second measure is an investment tax credit to support investments in clean hydrogen production.
Both initiatives mirror tax credits that were in the US bill.
Ottawa taxing share buybacks
To help pay for some of this new spending, the government plans to levy a tax on share buybacks.
When a public company turns a profit, it can repurchase some of its outstanding shares. It’s a way to return value to shareholders.
The government is promising a 2 per cent tax on the net value of all types of share buybacks by public corporations in Canada.
In addition to raising $2.1 billion over five years in revenue for the government, Ottawa expects the tax will encourage companies to use more of their profits to expand operations in Canada.
“We want to try and tilt the balance in favor of investing the capital, enhancing productive capacity, more research and development. We don’t want companies to just be a cash cow, frankly,” a senior official told reporters.