Canada’s Fall Economic Statement 2022: Stormy with a Chance of Recession

“Canada cannot avoid the global slowdown to come” –Hon. Chrystia Freeland

Over the last seven years Canada has been pounded by global events that defied any crystal ball. Britain leaving the EU, Donald Trump’s threat to free trade, the COVID-19 pandemic, Russia’s invasion of Ukraine, run away global inflation and China’s increased belligerence have created substantial risks to Canada’s economy.

In the face of ongoing uncertainty, Finance Minister and Deputy Prime Minister Chrystia Freeland’s 2022 Fall Economic Statement (FES) was framed as seeking to address urgent problems, while leaving room to address tomorrow’s calamities.

The bill to implement portions of the FES, as well as some measures from the 2022 Budget, will be introduced shortly and government will likely try to pass the legislation before the House rises for the holidays. Given the confidence and supply agreement in place with the NDP, it is expected this bill will be passed.

Three Key Parts to the Liberal FES

The government would say there are three elements to its plan:

1. Preserve and grow tomorrow’s fiscal firepower to protect Canadians against a looming slowdown or recession.
2. Support those most vulnerable today without making the Bank of Canada’s fight against inflation harder.
3. Respond to threats to our economy, ranging from labour shortages to President Joe Biden’s investments in clean technology.

Minister Freeland warned that fiscally the next few months will be difficult, with unemployment likely to rise, but the magnitude and shape of a future slowdown is uncertain.

Instead of new measures now that would exacerbate inflation, the Liberal government highlights the comparatively rosy fiscal situation in Canada, and then sets up potential spending on new programs in Budget 2023.

Financial State of the Nation

The FES forecasts budgetary revenue of $445.9 billion for 2022-23, higher than predicted in Budget 2022 ($408.4 billion). This is in large part due to increased tax revenues driven by higher prices.

The 2022-2023 fiscal year will see a smaller deficit ($36.4 billion) than previously anticipated, despite increased public debt charges. Of note, the FES suggest a surplus by 2027-2028.

The FES paints a grimmer outlook for the Canadian economy then suggested in Budget 2022. While Finance Canada does not predict negative growth, GDP is expected to increase by only 0.7 per cent in 2023. This is a significant reduction from the 3.1 per cent forecasted earlier this year.

As a result of lower economic activity, expected unemployment rates for 2023 and 2024 are expected to reach 6.1 and 6.2 per cent, up from 5.5 per cent forecast in Budget 2022.

Opposition Reaction

Conservative Leader Pierre Poilievre indicates the Conservatives will vote against the FES and reiterating concerns that the Liberals’ agenda triples taxes on gas, heating and groceries. He also criticized the FES for failing to provide solutions to the current housing crisis.

The Liberals remain confident that the NDP will support the government on any confidence votes, thus ensuring the minority government’s stability while the NDP focuses on the 2023 Alberta election.

Politically, this allows the Liberal government to keep their powder dry on any major new social spending until NDP support potentially becomes more tenuous in 2024 or 2025. Even then, the Liberals could find support from the Bloc Quebecois who are anxious to avoid an early election after seeing the Parti Quebecois almost wiped out in the recent Quebec election.

On Inflation

Freeland emphasized that broad relief is stimulative to the economy, resulting in further pressure on the Bank of Canada to increase interest rates. Instead, the government will continue with previously announced plans to target spending to those it considers most vulnerable to inflation and a looming slowdown.

Targeted Economic Growth Policies

The FES takes action on specific economic challenges created by President Biden’s Inflation Reduction Act (IRA) which implemented massive subsidies for clean technology, creating an American or North American based supply chain for everything from batteries to hydrogen.

The government also announced more support for skills development and immigration to address labour shortages, with a focus on health, building trades and manufacturing.

More Details on Budget 2022 Commitments

The FES provided more details on some of the commitments made by the Liberals in the last budget:

• The Canada Growth Fund is billed as being designed to attract private sector investment focused on climate change, low-carbon industries, and critical supply chains. The FES added an additional area of focus for the fund, targeting acceleration of the deployment of technologies such as low-carbon hydrogen and carbon capture technologies. Funding will start rolling out in 2022-2023.
• Previously announced refundable investment tax credit in clean technologies. The FES expands the scope of the credit beyond battery storage solutions and clean hydrogen to other technologies including electricity generation systems like small modular nuclear reactors, industrial zero-emission vehicles and charging/refueling equipment.
• Consultations on the previously announced refundable investment tax credit for clean hydrogen will be launched in the coming week. If all eligibility criteria are met, the credit could be as high as 40 per cent.
• A blueprint for the Canadian Innovation and Investment Agency will be released shortly.

New Commitments

The FES proposes a few initiatives targeting skills and competitiveness, and mentions that “significant further measures will be introduced in Budget 2023” as the government further develops its response to the IRA. Measures set out in the FES include:

• Create a Sustainable Jobs Training Centre to examine the skills of the labour force, forecast future skills requirements and develop curriculum, micro-credentials and on-site learning.
• Establish a new sustainable jobs stream focused on “green skills” under the Union Training and Innovation Program.
• Launch the Sustainable Jobs Secretariat that will act as a one-stop shop for workers and employers looking for information on federal programs, funding, and services.
• Implement certain actions aligned with the National Supply Chain Task Force’s propositions to enhance the resilience of supply chains.
• Investment to modernize the National Research Council’s scientific infrastructure.

New Taxes

The FES proposes a two per cent tax on corporate stock buybacks, with details to come in Budget 2023, and implementation in 2024.

The FES also reaffirms the government’s commitment to a new minimum personal tax regime, with details expected in Budget 2023.