Canada’s Federal Budget 2023: Uncertain Economic Times and a Response to Biden

Budgets are an opportunity for governments to set policy and establish their political economic agenda for the coming year. The 2023 federal budget from Finance Minister Chrystia Freeland sets out the governing Liberal Party’s approach to Canada’s most pressing challenges and opportunities.

Canada’s Challenges Piling Up

Canada has been buffeted by inflation, interest rate hikes, pressure on our health care system, Russia’s war of aggression in Ukraine, and a banking crisis in the United States leading to contagion in Europe.

Combined with a need to respond to the U.S. Inflation Reduction Act (IRA), which included unprecedented subsidies and tax cuts aimed at stimulating U.S. domestic manufacturing and the commercialization of green technologies, much was riding on Budget 2023 to help boost Canada’s competitiveness in these areas.

Politically, Prime Minister Justin Trudeau and the Liberal Government had a rocky start to 2023. Accusations of unchecked foreign election interference by China, a more aggressive opposition with Conservative Party leader Pierre Poilievre at the helm, and a government that can be slow to address and implement policy, has resulted in ongoing challenges for the Liberals.

The Numbers – A Brief Summary

Budget 2023 projects a $40.1 billion deficit for the current fiscal year, almost $10 billion higher than what was projected in November’s Fall Economic Statement (FES).  The bottom line – the government does not project a return to a balanced budget any time soon, projecting deficits as far out as fiscal year 2027-28, with a massive difference between Freeland’s November FES and today’s budget of $52.7 billion in increased spending over five years.

In addition, the Department of Finance’s survey of private sector economists projects a “shallow recession”, noting that the economy is expected to slow more than projected in the FES.  However, unemployment is expected to remain low.

While fiscal hawks may continue to blanch at the government’s level of spending, today’s budget keeps in line with Liberal fiscal policy on debt and deficits and will be a sharp point of contrast between the governing Liberals and the opposition Conservatives, creating a sustained wedge issue between the parties.

Trying to Keep a Fine Political Balance

In Budget 2023, the Liberals have tried to ensure they do not jeopardize their Supply and Confidence Agreement with Jagmeet Singh and the NDP. The Liberals have already had to make some changes to the deal, given that Singh’s key demand for universal pharmacare by the end of this year is unlikely to happen. Liberal government officials were told to try and find other wins for the NDP ahead of today’s budget to ensure they remained on side.

“The Match Game” – Canada and the Challenge of the Inflation Reduction Act (IRA)

The recent visit to Ottawa by U.S. President Joe Biden was in many ways a precursor to the federal budget.  Biden’s 2022 IRA and the $370 billion U.S. it provided to spur clean energy technology, manufacturing, and innovation projects in the U.S. has no doubt created competitiveness issues in Canada.

To his credit, in his speech to the House of Commons, President Biden took pains to highlight the need for North American supply chain integration, noting that the IRA includes tax credits for electric vehicles assembled in Canada. He also noted that the U.S. is making funding available under the Defense Production Act to allow Canadian companies to mine and process the critical minerals needed for electric vehicles and batteries, and to package semi-conductors and circuit boards.

Nonetheless, Freeland and her Finance officials have been looking at targeted investments into the Canadian economy to prevent a massive drain of business south of the border, while knowing that there is no way that the Government of Canada can compete dollar-for-dollar with the fiscal firepower of the U.S. Treasury.  With politics never far behind, the budget also took pains to note what the government considers to be a major win: “Buy America” is now “Buy North America.”

Budget 2023 Promises Spending and Tax Breaks for “Clean” Projects

With President Biden’s visit as the lead-in to the 2023 budget, Freeland was more than happy to double down on what the government calls a “Made-In-Canada Plan for Affordable Energy, Good Jobs and a Growing Clean Economy.”  The planks of this policy include:

• Investment tax credits, accompanied by regulations, to ensure workers also receive certain benefits and guarantees
• Low-cost strategic financing
• Targeted spending to respond to certain projects “of national economic significance”

Ministers have gone to great lengths to note that Canada is unable to match the U.S. approach to incentivizing numerous forms of clean technology investment and manufacturing. In this budget, the government proposed a more refined approach, identifying areas in which it believes Canada has a comparative advantage and making targeted investments that build on the 2022 Fall Economic Statement (FES).

The budget proposed the introduction of a clean technology manufacturing investment tax credit to complement the clean hydrogen and clean technology investment tax credits introduced in the FES. This tax credit is intended to boost the ‘supply’ side of clean technologies and alongside the hoped-for demand from the FES investment tax credits.

These tax credits also highlight the areas where the federal government thinks Canada can compete and gain material market share: hydrogen, critical minerals extraction and processing, nuclear energy, ZEV manufacturing, and battery manufacturing appear to be the federal government’s chosen winners going forward.

Altogether, the government is projecting spending in the realm of $20 billion over the next five years on this wide variety of initiatives, including spending over the next five years of:

• $6.4 billion, over the next four years, for an investment tax credit for clean electricity
• $1 billion for direct support to clean electricity projects
• $4.5 billion in investment tax credits for clean tech manufacturing
• $5.5 billion in investment tax credits for clean hydrogen
• $921 million for transportation and infrastructure

This accompanies previous announcements in the 2022 Fall Economic Statement (FES) that included the Canada Growth Fund (CGF) with a mandate to attract private capital into investments that reduce emissions and meet climate targets, accelerate the deployment of technologies like CCUS, capitalize on Canada’s natural resources sector and critical minerals supply chains, and scale up new companies.

However, the Fund still is extremely embryonic and not expected to get off the ground until at least much later in 2023.  Today’s budget did note that PSP Investments will handle the Fund’s assets, and that other structural items are coming in the Budget Implementation Act.

Canada is not the only government that has had to respond the competitiveness issues created by the IRA – the European Union recently introduced the Net-Zero Industry Act to drastically scale up the manufacturing of clean technologies.

Affordability and the Cost of Living – A Political Threat for Any Party

Like other industrialized economies, the impact of inflation and the cost of living has made life increasingly difficult for many Canadians, especially middle- and lower-income citizens. And when governments have challenges in being seen to help its citizens, political uncertainty is sure to follow.

Given that the Conservatives’ Poilievre has made inflation and the cost of living one of his main critiques of the government, coupled with recent NDP focus on issues like the price of food, it’s no surprise that Freeland’s budget included such items as:

• A $2.5 billion “grocery rebate” delivered through the GST credit
• An “intent to work with regulatory agencies to reduce junk fees for Canadians”, echoing President Biden’s State of the Union Address in January
• Increasing the RESP withdrawal limit for a student’s first semester of post-secondary education,
• Announcing commitments from major credit card companies to lower fees for small businesses
• A set of “mortgage code of conduct guidelines” for those facing “exceptional circumstances,” including allowing for the adjustment of payment schedules, or authorizing lump-sum payments

While Liberals will certainly want to portray these as major accomplishments, the reality is that the budget provides few details on how these initiatives will work in practice.  Expect to see more details rolled out in the coming weeks and months, including in the upcoming Budget Implementation Acts.

When talking about affordability, the Liberals haven’t always been focused on managing the pennies and nickels when it comes to government spending.  They have come under increasing fire from all sides around spending on travel (including a $6,000 a night hotel room for the Prime Minister in London) and a massive increase in spending on outside consultancies to help run government programs.  That’s why it was not surprising to see the Liberals pre-position in the lead up to the budget cuts to travel and consultants, amounting to $7 billion over 5 years, and $1.7 billion per year after that.

The question will be whether these actions are seen by voters as effective in the fight against inflation and the cost of living.  Pierre Poilievre has made cost of living and affordability one of his bread-and-butter issues and has challenged the Liberals in this area since he became Conservative Leader.

“Same as it Always Was” – Health Care Challenges

Meeting the challenges of health care spending in any federal or provincial budget is an annual exercise that governments of all stripes must face. Earlier this year, Prime Minister Trudeau and the premiers sat down to reach an agreement on increased spending, something that all premiers united around to find common cause against “Ottawa.”

So, it was not surprising to see the budget re-announce February’s deal with the premiers, while also adding more money to the “New Canadian Dental Care Plan” – a key demand of the New Democrats as part of their agreement with the Liberals.  The budget includes $13 billion over five years, to provide dental coverage of uninsured Canadians with annual family income under $90,000, starting at the end of 2023.  It also includes $250 million over three years for vulnerable populations to access care.

Economic Analysis

After suffering significant harm in 2020 and 2021 as a result of COVID, the Canadian economy is once again headed for challenging and uncertain times. The real GDP growth forecasts in Budget 2023 are lower than those included in the Fall Economic Statement (FES) tabled last November. The economy is expected to teeter on the brink of a recession in 2023 with real GDP growing by only 0.3% on the year (down from 0.7% in the FES).  Growth was also revised downwards for 2024 (from 1.9% in the FES to 1.5% in the Budget).

As a result of slower economic activity, the budget forecasts the unemployment rate for 2023 will slightly rise from its current level of 5% in February to 5.8% for 2023. This forecast is slightly more optimistic than the one included in the FES (6.1%), highlighting the resilience of the labour market so far this year.  However, the unemployment rate is expected to rise to 6.2% in 2024 because of low economic growth.

Higher interest rates and financing costs may also limit the short-term uptake of the investment tax credits included in Budget 2023.  Amid current market conditions and difficulties accessing capital, Canadian companies have been putting investment plans on hold. Statistics Canada reported that business spending on machinery and equipment fell by nearly 8% in the last quarter of 2022. While the budget measures are meant to provide incentives and certainty, economic forces will mitigate these effects and weigh on business decisions in the coming quarters as firms brace for slower demand and a potential recession.

Other Tax Initiatives

In addition to many of the tax credits announced around clean energy, Budget 2023 contains several other initiatives around taxes.  This includes:

• A proposed “beer tax” reduced from a 6% increase as of April 1 to 2%
• Implementation details around the previously announced 2% tax on share buybacks
• Details around how a global minimum tax on multinational companies led by the OECD will apply
• An increase to the cost of airline tickets as part of the Air Travellers Security Charge, and
• Adding teeth to an anti-avoidance rule known as the General Anti-Avoidance Rule, or the “GAAR”

Opposition Reaction

Conservative Party leader Pierre Poilievre was one of the first out of the gate to launch a blistering response to the budget. Not surprisingly, Poilievre and his finance critic, Jasraj Singh Hallan quickly noted that they would be voting against the budget, calling it a “full frontal attack on the paycheques of hardworking Canadians by the costly coalition.”

Poilievre noted that Conservatives had called for three things leading up to the budget – reducing debts and deficits, eliminating carbon and other taxes, and “getting rid of the gatekeepers” by getting more housing built quicker.  However, Poilievre made it clear that Conservatives will continue to fight Liberals on inflation, suggesting that today’s budget only adds more fuel to the inflation fire.

New Democrats and their leader Jagmeet Singh have been walking a delicate tightrope for some time to maintain the supply and confidence agreement, while also trying to appease those who have accused them of giving the Liberals a “blank cheque” on a variety of issues.

Singh didn’t hold back in taking credit for budgetary measures that will “save many Canadians up to $1,700,” citing the doubling of the GST rebate and expansion of the dental care program. He also highlighted other investments as “NDP wins”, including investments in clean energy to create union jobs, the Urban, Rural, and Northern Indigenous Strategy, and support for students.

Singh made it clear that he will vote in favour of the 2023 budget, keeping the supply and confidence agreement intact for now.  With no mention of universal pharmacare in either the budget or the NDP’s official statement, it increasingly looks like that policy plank may be one only on paper.

In its budget critique, the Bloc Quebecois and its leader Yves-Francois Blanchet went back to its traditional opposition viewpoint that the budget did not have enough in it for Quebec.  Blanchet earlier had demanded increased health transfers to the level requested by Quebec, reforms to employment insurance, a suspension of the luxury tax on aircraft given Quebec’s aerospace industry, and an increase to federal spending on French language education outside of Quebec.

Not surprisingly, the Bloc will join the Conservatives in voting against the budget.