Trudeau Government budget update seeks to burnish economic credentials before election

Minister of Finance Bill Morneau has taken one of the Trudeau government’s last major opportunities to bolster Canadian economic confidence ahead of the 2019 election by unveiling its Fall Economic Statement.

The Fall Economic Statement arrives at an enviable political moment for the federal Liberals. By almost every metric, the national economy is performing well, and the Liberal Party saw a bump in the polls following the successful conclusion of United States-Mexico-Canada Agreement (USMCA) negotiations. Amid this, the Liberals are spending political capital both to extend the political benefits of that victory and expand the government’s reputation for competent economic management.

Unlike this year’s budget, which focussed primarily on addressing social issues valued by the Liberal base, Wednesday’s statement concentrated primarily on improving conditions for business.

Throughout the year, Morneau faced repeated calls from industry groups to match broad-based US tax cuts to staunch a loss of business competitiveness and investment. While that specific solution was rejected, the Liberal government signaled that it has heard the concern from the business community. Morneau announced a targeted suite of tax measures for investments in capital, asset acquisition, and intellectual property, as well as a commitment to regulatory (i.e. red tape) reduction and modernization across government.

In effect, Morneau’s statement represents a “Business Liberal” update designed to show a Liberal government that is responsive to business and avoiding the appearance of picking economic winners and losers. With an overall message of sustainable economic growth and consumer confidence, it also sets up the Trudeau government’s evolving economic narrative for Budget 2019 – the final economic document of its mandate.

The suite of tax measures announced today includes:

• Full and immediate write-offs for machinery and equipment costs for manufacturing and processing. This measure comes into effect for purchases after November 20, 2018, and will remain in force until 2024;
• Full and immediate write-offs for specified clean energy equipment within the clean technology sector;
• Introduction of an Accelerated Investment Incentive, which allows Canadian businesses to make larger tax deductions in the first year of investment to support asset acquisition (including capital expenditures and intellectual property);
• Creation of an Export Diversification Strategy, which aims to increase overseas exports by 50% through investments in trade infrastructure (e.g. rail, ports) and business and trade services supports. This new strategy reflects a continued federal focus on new trading partners;
• Extending the 15 per cent Mineral Exploration Tax Credit from 2019 to 2014 to help junior exploration companies raise capital to finance early-stage mining exploration; and
• Establishing a $775 million Social Finance Fund to help charities and non-profits access new financing from non-government investors in a manner that furthers social and environmental policy while providing financial returns for investors.

According to the federal government, these new measures effectively reduce Canada’s marginal effective tax rate (METR) on new investments to 13.8 per cent – the lowest in the G7.

Regulatory Reduction

The Liberal government committed to reviewing legislation and regulations to help reduce barriers to internal trade and business growth. The government will also launch a review to modernize the mandates of Canada’s regulatory departments to integrate regulatory efficiency and economic growth. Morneau also committed the government to introducing an Annual Modernization Bill in 2019, which would update or remove outdated and redundant regulatory requirements.

To support these new regulatory priorities, the government will establish a Centre for Regulatory Innovation to help streamline regulatory approaches and help businesses understand regulatory requirements. It will also establish an External Advisory Committee on Regulatory Competitiveness to identify regulatory barriers for federal ministers to resolve.

Recapitalization of the Strategic Innovation Fund

The Strategic Innovation Fund, the flagship program supporting the expansion of Canadian firms in Canada, received a much-anticipated cash injection of $800 million over five years. Since its inception, the fund has been significantly oversubscribed and this new funding will help the federal government respond to high industry demand.

Of note, much like the federal government did for the steel, aluminum, and broadband sectors earlier this year, it is creating a standalone carve-out of $100 million under the fund to support Canada’s forest sector.

Support for Canada’s News Organizations

The Fall Economic Statement also actualized the Trudeau government’s commitment to support Canada’s struggling news organizations. Building upon recommendations provided by national news outlets, the government announced a suite of measures designed to support both for-profit and non-profit news organizations, including: a refundable tax credit to support labour costs associated with developing original content; a temporary 15 per cent tax credit to support subscriptions to digital news media; and the effective designation of non-profit news organizations as charities (allowing the issuance of donation tax receipts).

Conservative Reaction

Heading into 2019, the big gap between the Liberals and the Conservatives will continue to be an ideological difference of opinion on deficit spending. In reacting to the fiscal update, Finance Critic Pierre Poilievre reinforced the anti-deficit message by stating that in 2015, the Conservatives left the Liberals with a balanced budget. Expect the Conservatives to continue to speak about the Liberal’s “uncontrolled spending and deficits” as they seek to frame themselves as better economic managers for the country. Today, the Liberals addressed some of the economic concerns through a targeted suite of economic measures and clearly placed a bet that persistent deficits are not a top-of-mind issue for voters.