Fall Economic Statement 2023: High Interest in Lowering Inflation

The federal government’s 2023 Fall Economic Statement (FES) comes as the government is forced to walk a narrow path, addressing the housing and affordability demands of voters, while simultaneously signalling the stark fiscal reality post-COVID. The combination of political challenges, economic headwinds and consumer stress mean the Liberals are fighting an uphill battle, but not an impossible one.

With the federal Liberals struggling in the polls, this FES revealed that they are looking to create more favourable conditions for themselves over the coming months.  The next election is likeliest at this mandate’s legislated end in October 2025, courtesy of the Liberal-NDP supply and confidence agreement, which shows no sign of imminent collapse (although not without some grousing in NDP ranks).

Liberal FES Strategy

As the effects of 2022/2023 interest rate increases make their way through the economy, Canadians are facing rising prices on everything from housing to groceries across the country. Uncertainty for the future has left many looking to governments, at all levels, to help ensure things get a little easier while also ensuring social security nets are ready for difficult economic times.

This new FES marks an opportunity to dampen stakeholder spending expectations for 2024, leaving the fiscal firepower for 2025. It also attempts to pass the ball on housing and affordability back into provincial jurisdictions. With Premier Danielle Smith in Alberta and others demanding the federal government stay out of its jurisdiction of housing, the stage is set to make popular moves in rental housing without having to take full responsibility for outcomes or future challenges.

While a strongly worded pharmacare motion at the federal NDP convention recently spawned unwarranted speculation about the potential downfall of their agreement with the struggling Liberals, the NDP will ultimately support the FES in an upcoming House of Commons vote.

Importantly, some caution in federal spending – outlined below – may help the Bank of Canada hold off on additional interest rate hikes in 2024. Behind the scenes, the government also notes that rent is one of the biggest components of the Consumer Price Index and the affordable rental housing thrust of the FES is also itself deflationary.Conservative Reaction – A Government in Waiting?

Conservative Leader Pierre Poilievre wasted no time in his official response to declare that his “Common Sense Conservatives” would vote “non-confidence” and against the FES.  He suggested that the Liberals were “increasing taxes on the back of middle-class people”, noted the lack of a plan to return to balance with “the worst inflation in forty years” and accused the government of “quadrupling the carbon tax” while suggesting a Conservative government under his leadership would “axe the tax”.

In some ways, the FES is tailor-made for Poilievre and the Conservatives to claim Liberal actions on affordability, housing and cost of living are not fast enough or don’t go far enough.  Given that these three issues have generally driven the challenging agenda that the government faced over the last year, the next few weeks up to Parliament’s holiday break will be interesting to watch. Will today’s FES start to change the channel for the Liberals, or will it be a case of “underselling now to over-deliver later” is too little, too late.

NDP Reaction: CEOs win, Canadians Lose

The NDP was quick to claim ownership over “the only measures in the FES that will make a difference for Canadians…”, referring to the continued rollout of childcare and dental care, as well as the “tiny” measures to lower grocery prices and build truly affordable homes for Canadians.

In light of the supply and confidence agreement, the NDP’s reaction show a fourth party trying to differentiate itself from the Liberals and the Conservatives. With target ridings that can swing from orange to red or blue, Singh’s statement took care to target both government and opposition leaders’, while perhaps ignoring the BQ leader to make the party seem obsolete.

With the NDP and Liberals unable to come to an agreement on key components of the long-awaited pharmacare legislation ahead of the FES, Singh was quick to quash rumours that this would lead to the demise of their agreement, so long as legislation is tabled by the end of year. Following the FES, he reiterated that the NDP is not done fighting and will continue to push for better in Budget 2024– implying the NDP will support the FES, despite its ample criticisms.

Bloc Québécois Reaction – Firmly on the Fence for the FES

The BQ released a statement on Tuesday evening, reacting with disappointment to the FES as presented. Yves-Francois Blanchet decried the government for ignoring the crises facing Quebecers, and ignoring demands made by the BQ. Particularly, the Bloc were disappointed in the lack of measures to tackle the housing crisis, inadequate support for SMEs paying back CEBA loans, and inadequate protections for local newsrooms.

Blanchet also made his disappointment clear regarding the lack of financial support for seniors, a priority the Bloc have focused on in recent months. “The Bloc Québécois will evaluate the meager new announcements on their merits, but denounces a statement disconnected from the urgent needs of Quebecers,” announced Blanchet.

Highlights from the FES

• Unlike last year’s Fall Economic Statement, this year’s does not provide any path back to balance between now and 2027-28.
• Deficits are projected to range from $40 billion this fiscal year, $38 billion over the next two years, with a target of $24 billion by 2027-28.
• Unemployment is also expected to rise from around the current rate of 5.7% to a projection of 6.5% in the second quarter of next year.
• The FES also cautions that there could be a shallow recession in Canada driven by persistent underlying inflation and higher interest rates in its downside scenario.
• In its upside scenario, underlying inflation falls faster than expected in the government’s private sector survey, enabling interest rate cuts sooner.

Housing

Housing is top of mind for voters and was the priority in the FES. The government announced an additional $15 billion in new loan funding, starting in 2025-26, for the Apartment Construction Loan Program. This investment aims to support the creation more than 30,000 additional new homes across Canada.

Freeland also shared the outline of a new mortgage charter, which sets parameters for financial institutions working with Canadians as they renew their mortgages. Further to this, the government introduced new measures for co-operative housing corporations that provide long-term rental accommodation, making them eligible for the removal of the GST on new rental housing, provided the other conditions have been met.

The FES included an additional $1 billion over three years, starting in 2025-26, for the Affordable Housing Fund. According to the government, this investment will support non-profit, co-op, and public housing providers in building more than 7,000 new homes by 2028.

The FES also includes a new investment of $309.3 million in new funding for the Co-operative Housing Development Program, which was announced in Budget 2022.

The federal government also intends to deny tax deductions for commercial short-term rental unit income in a bid to convert the units to long-term rental homes. On top of this, a $50 million fund will support municipal enforcement of restrictions on short-term rentals to just principal residences.

Green Economy

Several announcements were made in the FES for clean energy and clean technology. The FES announced that the Canada Growth Fund will be the principal federal entity issuing carbon contracts for difference, providing up to $7 billion of its current $15 billion in capital to issue all forms of contracts for difference and offtake agreements. Carbon “contracts for difference” (CCfDs) are a tool that governments can use to de-risk costly investments in technologies that slash greenhouse gas emissions from high-emitting industries like oil and gas. CCfDs work to reinforce carbon pricing, while attempting to eliminate various political and market risks to future prices.

The FES also includes more details around a suite of investment tax credits (ITCs) that had been previously announced in this spring’s Budget, with ITCs for clean technology, hydrogen, manufacturing, electricity and waste biomass either coming into effect in 2024 or open for consultations.  These ITCs were part of the government’s original response to the Biden Administration’s Inflation Reduction Act (IRA) and the risk that Canada might lose out on foreign investment.

The government will also advance the development of an Indigenous Loan Guarantee Program to help facilitate Indigenous equity ownership in major projects in the natural resource sector. The next steps will be announced in Budget 2024.

Additionally, the Department of Finance; Innovation, Science and Economic Development Canada; and Environment and Climate Change Canada will develop options for making climate disclosures mandatory for private companies.

As always, StrategyCorp is here to assist you in making sense of today’s FES, and where the challenges and opportunities lie in the coming weeks and months.