Federal Budget looks to prepare Canada for Trump-driven uncertainty

Amid the underlying uncertainty from global events, the Liberal Government of Canada released their second budget. Standing in stark contrast to the breathtaking expansion of deficits and spending in the 2016 Budget, the 2017 Budget is a relatively modest plan. It is a budget designed to produce a number of modest announcements and moves into new positions, but while leaving a significant amount of room to react to changing circumstances.

What is clear is that the federal government faces more uncertainty than they did a year ago. The election of Donald Trump and the UK’s Brexit decision unleashed questions about the future of NAFTA, NATO and the EU. As a result, this budget places smaller bets than the last one.

Long-term Challenges for Canada

The government also faces long-term challenges. Canadians as a people are aging, and the ratio of productive citizens to dependents is increasing. At the same time, under-employment for aboriginal Canadians, single-parents, recent immigrants and the disabled remains too high. The nature of work itself is evolving as technology threatens some of the well-paying jobs that ensured a middle-class lifestyle.

With increased uncertainty and long-term shifts in the workforce, the government chose to focus the budget on the skills workers bring to their jobs and the ability of the country to innovate. In short, the government is attempting to increase the capacity of Canadians to adapt to change, before the potential disruptions on the horizon hit them.

Skills Development and Training

With looming cycles of disruption in the economy, the government is working to turn these threats into opportunities by supporting lifelong learning. This includes:

• Reform of EI rules to increase access to training support for the unemployed
• Increasing in the Canada Student Grants and Loans available for part-time students, students who support families and adults who return to school
• Changing EI rules to make it easier to return to school while receiving benefits or while supporting an ill parent
• Pursuing top talent from around the work with the Global Skills Strategy and reforming the Express Entry program to be more responsive to the labour market

The government also identified six economic sectors that will be the focus of government effort:

• Digital
• Clean Technology
• Agri-food
• Advanced Manufacturing
• Bio-Sciences, and
• Clean Resources

To support these sectors, the government is proposing the creation of Superclusters by re-profiling the $800 million Budget 2016 cluster announcement and $150 million from previous infrastructure funding from the Fall Economic Statement for green technology and public transit.

In addition, the government is proposing the creation of Innovation Canada as a one-stop-shop for Canada’s innovators. It will close the regional innovation programs, and innovation programs in departments like Natural Resources, Agri-Food Canada and Economic Development.

The budget also proposes the creation of a Strategic Innovation Fund that consolidates existing funds in aerospace, technology demonstration, and automotive innovation. In addition, the government will be making $400 million available from BDC for a new Venture Capital Catalyst Initiative to increase late-stage venture capital.

Housing

The largest new spending initiative in the budget is the proposal to invest more than $11.2 billion over 11 years in the building and repair of Canada’s stock of affordable housing. It is the centrepiece of a National Housing Strategy that includes a renewed federal-provincial partnership.

This new funding could create new opportunities for unique private-public partnerships that will likely be shaped by federal priorities outlined in the budget, and by program design decisions at the provincial and municipal levels.

Tax Changes

The government’s stated tax policy objective is to cut taxes for the middle class while asking the wealthiest one per cent of Canadians to pay more. However, the tax moves in this budget were relatively modest:

• The government ended a number of tax avoidance strategies for high income individuals particular to the use of private corporations
• Several tax credits for caregivers, persons with disabilities and students were consolidated into a single Canada Caregiver Credit

Officials explain that this relative lack of action is a result of the election of Donald Trump in the United States. The potential for significant tax reductions in the US raised questions of the relative competitiveness of the Canadian economy and likely slowed more dramatic options like the rumoured move to increase the take from capital gains.

At the same time, the budget implements a two per cent increase in the excise tax on beer, wine and spirits. Excise taxes are generally imposed at the time of production or packaging.

Deficits

With last year’s federal budget, deficit spending began in earnest. This year’s budget projects deficits for coming years in the order of $23 billion in 2016–17 and $28.5 billion in 2017–18. Government numbers suggest that over the remainder of its forecast horizon, deficits are expected to decline gradually from $27.4 billion in 2018–19 to $18.8 billion in 2021–22 – but projections being what they are, should be qualified as a lot can happen given the uncertainty on the horizon.