Budget 2022 – Liberals Channel FDR to Address Post-COVID Stresses

Today, Deputy Prime Minister and Finance Minister Chrystia Freeland tabled her second budget. Compared to last year’s 663-page mid-pandemic magnum opus, this leaner 280-page document is an attempt to turn the corner from COVID, with the government claiming a V-shaped recovery and a deficit half the size of last year (although higher than anticipated even weeks ago).

In addition, this budget attempts to address fresh new crises stressing Canadians: housing affordability, supply chain snags, labour shortages, and the war in Ukraine. Of course, action on the Trudeau Liberal priorities of climate change, Indigenous reconciliation, diversity and inclusion, and public healthcare all found their way into the budget. As well, given the Liberal minority situation, NDP Leader Jagmeet Singh has given his blessing to the budget, saying that the Liberals have met their first test of trust in the recently signed “confidence and supply” agreement between the two parties.

Analysis

Canada’s post-COVID recovery is faster than our emergence from the 1981, 1990 and 2008 recessions, from a far deeper nadir. The budget projects future growth to exceed the United States for the next several years. Inflation is projected to drop to just over 2% next year and beyond. Unemployment is approaching the lowest rate in 50 years. Deficits are projected to fall from 4.6% of GDP to just 0.3% by 2026-27, close enough to balance that the Liberals are clearly avoiding making that promise to maintain fiscal flexibility.

Despite positive economic charts and graphs, the Liberals believe that Canadians are feeling intense anxiety as they navigate a post-pandemic world. Fears around housing unaffordability, supply chain challenges and a war in Ukraine are compounded by the frayed nerves after extended isolation and the anxieties some Canadians encounter as they unmask and return to the office after two years. This budget is the Liberal attempt to address this anxiety. Liberal polling must be illustrating that Canadians are not feeling a robust recovery, perhaps because of inflation, even if the economic indicators presented in today’s budget say it is present.

Increasing revenues, partly due to tax revenues from increased global energy demand, enable Freeland to restore a debt-to-GDP ratio fiscal anchor and then support the Liberals’ three main pillars to create future growth:

1. Investing in people – housing affordability, skilled immigration, and childcare.
2. Investing in the green transition – pollution pricing, CCUS tax credit, and Canada Growth Fund
3. Investing in innovation and productivity – Small business tax cut, IP, and R&D tax review

The Russian invasion of Ukraine added an unexpected fourth pillar: investing in defense. This includes additional military spending, along with enhanced cyber-security funding, stronger anti-money laundering laws, and $500 million in direct military aid to Ukraine.

These four pillars are intended to address the biggest barrier the government sees to future economic growth: fear. The Liberals believe it is fear, rather than an uncertain and unpredictable regulatory regime, that is keeping Canadians from starting a business, expanding production, researching a new breakthrough, buying a home, or capping their emissions. Regardless of the source, fear or an unpredictable regulatory regime, Canada will fall behind in the world if these issues are not addressed.

Expect a spring and summer of soothing announcements by federal Ministers reassuring Canadians that they have a plan for what concerns them. Like Roosevelt in 1932, Freeland hopes the only thing we have to fear is fear itself.

Today’s crises are the focus of this budget. How the government will address future threats awaits the selection of a new Conservative leader. Liberals believe Conservative leadership contender Pierre Poilievre would polarize the electorate, enabling the Liberals to reinforce their existing coalition of centre-left voters with a formula of modest increases in the safety net and social issue polarization. Items like the review announced today into cryptocurrency, a Poilievre signature issue, may be a way for the Trudeau Liberal government to lay some traps in the short term.

Perhaps Jean Charest could compete for the centrist voters left behind by a Liberal Party that is increasingly abandoning the centre of the political spectrum for the left. However, the former Quebec Premier will be vulnerable to wedge issues on everything from China to labour unions that separate him from most of his caucus. The Conservative Party itself could be vulnerable if Charest cannot bring the Progressive Conservative and former Reform Party members together.

Pillar 1 – Investing in People

Housing

Facing increased pressure from rising house prices and inflation, the Liberals were under pressure to try and “do something” to tackle Canada’s red-hot real estate market.

Today’s budget includes $10.1 billion in spending for increasing housing supply by investing in new construction, temporarily banning foreign home buyers, and programs to address homelessness.

The Liberals also followed through on their 2021 campaign commitment to create a $4 billion Housing Accelerator Fund, intended to support the creation of 100,000 new units through direct spending on housing or streamlining delivery processes. They also proposed a Tax-Free First Home Savings Account which would allow first-time homebuyers to save for down payments tax-free.

Reconciliation

Budget 2022 is consistent with past Liberal budgets with the inclusion of a significant focus on reconciliation.  New spending of over $11 billion is committed in the next six years for Indigenous children and families, to address the legacy of residential schools, and to improve health outcomes, housing, and access to clean drinking water.

Health

With their new confidence agreement with the NDP, the Liberals pledged significant new funding in healthcare. One of the NDP’s biggest asks, $5.3 billion in funding for national dental care is the largest amount of spending in the healthcare portfolio. Liberals also committed to continue developing a national pharmacare plan. There is funding for new doctors and nurses who choose to practice in rural and remote communities and for a new Foreign Credential Recognition Program.

Provinces and territories can also expect additional funding through the Canada Health Transfer and the Canada Social Transfer.

Overall, the budget pledges over $100 billion to support health and wellness initiatives.

Tax

The government is targeting common tax planning using Canadian controlled private corporations incorporated offshore to hold passive income portfolios, as well as surplus stripping transactions where dividends are effectively converted into lower taxed capital gains, unless the strip is in contemplation of an intergenerational business transfer.

Finance plans to implement new specific anti-avoidance rules, as well as strengthen the General Anti-Avoidance Rule (GAAR). For example, creating a specific anti-avoidance rule to prevent taxpayers from using coupon stripping transactions which play on the differential treatment under Canada’s tax treaties to avoid tax on cross border interest payments. The GAAR is intended to prevent abusive tax avoidance transactions, but in many cases has limited efficacy, and Budget 2022 promises consultation aimed at modernizing the application of the GAAR.

The government is also launching a consultation process in advance of implementing the OECD Pillar Two initiative of imposing a global minimum effective tax rate of 15%, and a domestic top up tax.

Regarding financial institutions, Budget 2022 promises consideration of changes to the financial transaction approval process to limit the ability for federally regulated financial institutions tax havens to engage in aggressive tax avoidance. Additionally, they indicated plans to close one of the few remaining double deduction loopholes by denying the deduction for a dividend received where a financial institution is using hedging and short selling arrangements which take advantage of the preferential tax treatment Canadian dividend paying stocks receive.

The Budget further targets financial institutions, moving forward with the long promised temporary Canada Recovery Dividend, which will see banks and life insurance companies pay a one-time 15% tax on taxable income above $1 billion for the 2021 tax year. Additionally, the corporate income tax rate for banks and lifecos will increase by 1.5 percentage points on taxable income above $100 million.

Finally, on the personal tax side, there will be a re-examination of the Alternative Minimum Tax designed to prevent wealthy Canadians from avoiding tax.

Pillar 2 – Investing in the green transition

On the heels of the release of the government’s much-anticipated Emissions Reduction Plan (ERP) last week (read our analysis here), Budget 2022 includes major new spending for a range of programs both old and new, aimed at fighting climate change, protecting nature, and building a clean economy.

Energy and Transportation

The budget includes tax credits for Carbon Capture Utilization and Storage (CCUS) expenses, starting this year. There is also $850 million for the government’s commitment to a net-zero electricity system by 2035, a key pillar of the Liberal climate plan. On transportation, over $2 billion is committed to supporting the transition to Zero-Emission Vehicles (ZEVs) for consumers and businesses.

Buildings, Agriculture and Nature

Buildings and agriculture are also identified as key sectors to reduce emissions in the ERP, and there is money to recapitalize existing programs and fund new green initiatives for these sectors, including over $1 billion for sustainable agriculture and $4.4 billion to create the Canada Greener Homes Loan program. Significant new funding is also allocated for protecting oceans and freshwater, eliminating plastic waste, and managing wildfires.

Pillar 3 – Investing in innovation and productivity

The Budget’s third pillar is aimed at spurring economic growth and innovation. One of the two policies under this umbrella include a Canada Growth Fund to attract part of the trillions of dollars in private capital that will be invested globally in green jobs and industries in the coming years (although this seems duplicative with the goals of the Canada Infrastructure Bank). The fund will be initially capitalized at $15 billion over the next five years.

The second policy announcement is $1 billion to create a Canadian Innovation and Investment Agency, which will work with new and established industries and businesses to help them compete globally. An increased number of small businesses will now also qualify for the small business tax rate.

Supply Chains

Supply chains are also a feature of Budget 2022, with $3.8 billion allocated over eight years, starting in 2022-23, to implement Canada’s first Critical Minerals Strategy and create new jobs across the critical minerals supply chain. Over $550 million is also being made available to support Transport Canada to improve Canada’s supply chain infrastructure.

Pillar 4 – Canada’s Place in the World (Defence Spending)

Defence, Security and Ukraine

The Russian invasion of Ukraine pushed the government to announce $8 billion in new funding to reinforce the Canadian military. The current situation also pushed the government to announce a review to reassess Canada’s current defence policy, Strong, Secure, Engaged following significant geopolitical shifts. Though the amount is sizeable, it does not bring Canada to the NATO target of 2% of GDP in defence spending. This funding aims to resolve key issues in Canada’s national defence, such as bolstering the capabilities of the CAF, supporting the culture change and a safe and healthy working environment, and reinforcing cyber security measures.

The $875.2 million investment to enhance the country’s cyber security comes at crucial time with governments and industries worldwide being victims of cyber-attacks on key infrastructure.

Canada has been at the forefront in supporting Ukraine in its efforts to defend its sovereignty against Russia’s illegal invasion. Continuing this support, the government has announced more than $1.2 billion in direct contributions to support Ukraine and its people in 2022. This includes new loan resources to the Ukrainian government through the IMF and further military aid.

Opposition Reactions

Conservatives

Interim Conservative Party Leader Candace Bergen was quick to label the budget as an “NDP budget” and criticized the Liberals for moving further to the left, further increasing costs for Canadians and creating permanent new spending programs that will only drive-up taxes. Bergen tweeted, “Canadians cannot afford any more increases to the cost of living. We need responsible spending from this government.” Bergen called on the government to deliver significant tax cuts and provide relief to Canadians in some way through “income tax, corporate tax, GST, or carbon tax” relief.

Several prominent Conservative Party leadership candidates were also quick to slam the budget. Pierre Poilievre stated that the Liberals “turbo-charged Justinflation.” Jean Charest stated that “today’s budget wasn’t a serious fiscal plan” and “won’t make life for Canadians more affordable” and “hardly mentioned Canadian innovators that will create the jobs of the future.”

NDP

Budget 2022 comes as the first test of the newly signed confidence and supply agreement between the Liberals and the NDP. In this case, the NDP took comfort in seeing reaffirmations of several key policy elements of the agreement. NDP Leader Jagmeet Singh stated that the “budget reflects the priorities we laid out and the agreement we had – honours that agreement, expansion of public health care with dental care is life changing. Still have critiques but sufficient for our support to continue.” Jagmeet Singh also expressed deep concerns with the actions of the Liberals on the environment and said subsidies to fossil fuel companies are the wrong approach.

Bloc Quebecois

The Bloc Quebecois will not support the budget, citing that the Liberals did not do enough to meet the conditions needed for their support, despite satisfying a request for increased funding for Indigenous housing. Bloc Quebecois Leader Yves-François Blanchet stated there were not enough elements that benefit seniors and those on fixed incomes who have been significantly impacted by rising inflation. The Bloc Quebecois leader also noted a lack of support for businesses who have been impacted by inflation and the ongoing war in Ukraine. Finally, in his most scathing criticism, Blanchet scolded the government for not phasing out supports for the oil and gas industry. Blanchet stated, “I believe this government intends to be the instrument of the oil and gas industry. The difference between this government and the Conservatives is that the Conservatives would admit it.”