WHAT I’M WATCHING FOR IN TUESDAY’S BUDGET
Tyler Meredith
Tuesday will be an important day for the Government of Canada as the Minister of Finance tables her third budget, in what is admittedly one of the trickier fiscal and economic situations in recent memory. It isn’t the hardest of challenges (arguably, pandemic budgeting), but it is a moment where the volatility is high and so the choices and trade-offs leave more to judgement and uncertainty than is normally the case.
Here’s a list of 10 things I’ll be watching for in the document and subsequent follow through by the government.
Some are big, some are small. But all are important policy files and issues the government may (or hopefully) have been thinking about going into Tuesday.
1) How much has changed on the fiscal and economic front before any new dollar is spent?
A big part of the Budget context is determined by the macro economic environment, and the inputs given to the government by its quarterly survey of private sector forecasters.
The last survey was around late January (at its normally scheduled time in the lead up to the Budget). Since then and since the Fall Economic Statement (FES), growth has slowed, inflation has come down faster than expected and global macro instability is up. This all makes for a more challenging and ever shifting platform on which to set a future path.
As one example, the price of oil, as measured by West Texas Intermediate prices, is off by almost $20 USD / barrel, from the FES outlook of an average of $88 this year. That decline, which indirectly touches both personal and corporate income in the economy, and by extension the size of the fiscal pie available, is a big indicator of how much has changed in a short period. And what could yet change.
Source: Fall Economic Statement 2022, table A1.1
Given the lag since the last forecast was taken weeks ago, some of this simply cannot be adjusted for in the baseline. It is what it is.
As a result, there will be even more weight on how the government communicates its “downside scenario”, which in recent years has replaced the old “risk adjustment” that was built into the fiscal track. And this may be a year in which the downside scenario gives as good an indication as any of what is to come (or not, we will see).
2) Fiscal “restraint”
As a result of this slowing growth / risk of a possible recession, the fiscal track will potentially worsen, albeit modestly, even before any new spending is considered. And this will likely lead to a shorter-term focus on the part of the government to show a posture of “restraint”.
Everyone has their own views on what constitutes restraint, but it has likely been a useful framing device internally over the course of the Budget, in order to say no to some things. Expect the rate of spending growth to slow, while overall spending still goes up year over year.
In a broader context, though, this makes for a tough balancing act politically and in general policy terms. Because the need for investment is just as strong.
We have big needs for spending to help support a long-term path of jobs and growth, which is clearly going to be a focus this year, particularly in order to respond to the competitive pressures with the United States to build a clean growth economy and unlock important investment decisions from businesses.
Not to mention, the need to shore up our ailing health care system, and provide targeted relief from inflation to vulnerable and low income populations.
It’s hard to straddle multiple lanes, and there is a risk that doing so confuses things. How this is articulated and executed will be interesting.
3) Biden, Trudeau and Clean Growth
If you don’t have time to read the Budget document or watch the speech on Tuesday, my guess is that the next best analogue you will find for what Tuesday ‘means’, was on showcase in the Biden visit.
Biden and Trudeau are progressive kindred spirits, both offering each other a model to draw from or replicate on different issues. This is true both in rhetoric as well as policy. Every time the US creates progressive policy space on an issue adjacent to things the government is already working on, you usually see a follow through on the other side of the border. And sometimes even vice versa.
We saw this in the FES with the tax on share buybacks that was pulled from Biden’s grand bargain with Senator Manchin last summer.
The Biden visit focused a lot on the clean economy and the role of unions and good, middle-class jobs in driving that future economic vision. It would be surprising if we didn’t see more of this, filled in with further details on investments in such areas as:
attracting more automotive investment;
building battery production;
unlocking the promised opportunities in oil and gas with Carbon Capture Utilization and Storage (CCUS), after 2 years of tax policy development;
accelerating investment and regulatory reviews of critical mineral projects;
supporting industrial decarbonization in key commodities like steel, aluminum and cement;
scaling up clean energy and renewables in line with the Clean Electricity Standard; and
developing our clean tech sector.
This is an economic vision that will tie together west, central and eastern Canada under an umbrella that also fits with where the U.S. is going. It is big, bold and smart, and puts the government where it needs to be: focused on jobs and growth, in a world where our continental alliance matters more than perhaps anything else.
The Budget gives cash and rhetorical focus to these things, but it may also represent a coordinated economic blueprint across government that will constitute the focus of a lot of the remainder of the government’s mandate.
4) Strategic policy reviews
With the the context of “restraint”, it’s important to remember that the government announced a series of strategic policy reviews last Budget that was meant to rebalance spending a bit post COVID. The program review component of these efforts was estimated to save $6 billion between 2024-25 and 2026-27.
That money was already “booked” in the fiscal framework at that time, so it can’t be reused again. It now has to be “found” since the savings start a year from now.
There may or may be some update on how that process is going. Something to watch.
5) The composition of spending matters most
In recent months there has been a lot of talk about how, if at all, fiscal policy is affecting inflation. Many of these commentaries just casually assume all spending = demand.
To be brutally honest, this is a pretty dumb level of debate for what is otherwise a very serious and timely issue.
As smarter people than me have noted, about 85% of the reason that demand has exceeded our productive capacity is because of factors either outside of Canada or because of limitations on supply.
We need more workers, more housing, more industrial capacity, and more innovation. Some (maybe all) of that takes strategic investment.
It is not about whether to spend or not, but rather how we spend. Let’s look past the deficit numbers and focus on the composition. How much is consumption, and how much is meant for long term growth and investment?
6) Housing: more, more, and more please
Canadians are increasingly aware that housing supply is just not keeping up with the pace we need.
Last year’s Budget included a lot of big moves to start on this front, including the new Housing Accelerator Fund, which was also finally unveiled last week. Provinces are also experimenting in this space, although arguably no one has found the scale, ambition and urgency that is truly needed.
Despite this increasingly critical policy challenge, much of the pre-Budget speculation has ignored what role, if any, housing investments will play on Tuesday. Does the government leave this to next year, or double down further?
More housing supply is urgently needed. Yesterday.
7) Tying up loose Finance Canada policy threads
Since the government was re-elected in 2021, a lot of big tax and regulatory files which transit Finance Canada have been in flight, with a myriad of consultations happening on many different things. The Budget is the time in which those files would ordinarily appear in substance.
People have focused a lot on CCUS and the framework set out in the fall for investment credits to support clean tech. Others I would also be watching for potential signs of progress:
Digital Services Tax: Canada has been clear it intends to bring something into force next year to tax large web giants in the same way that many European countries already do, unless there is a clear off ramp in the OECD global tax reform agreement. A draft of the tax was issued in December 2021. This year the government has to legislate; will that be now or in the fall?
Pillar 1 and Pillar 2 global tax model rules: similarly, a version of how Canada will implement the OECD agreement also needs to be released this year. While the focus of these tax changes is largely on global multi-nationals, there are a few Canadian companies who find themselves in that category. The Budget is as good a time as any to show more detail on how this will be translated domestically, and whether the original timelines remain on track.
New minimum tax on high earners: the government has committed to bring in place a new and more comprehensive set of rules to ensure that those who earn enough to join the ranks of the highest income bracket actually pay a minimum of 15% (the lowest tax bracket rate) when all deductions, credits and tax planning strategies are considered. This is effectively what is known as the “Buffett rule” – so that a high earner pays at least the same tax rate as the lowest income earner. Although most high earners already pay well in excess of that minimum, thousands of high income Canadians do escape this policy objective. We should expect to see a model released for consultation.
Modernizing the general anti-avoidance rule: GAAR, as it is known, is the foundation of all the various tools the Canada Revenue Agency has in order to go after sophisticated tax planning. The GAAR was last designed decades ago and courts have been increasingly limiting how GAAR can be used as a safeguard, as it becomes difficult to apply in a world in which digitalization makes it easy to restructure companies and asset holdings across global borders. A massive consultation was launched last summer on a new proposed regime that would institute a requirement that companies and people must demonstrate a legitimate “economic substance” to their proposed tax structure for it to be valid. The NDP are strongly in favour of movement in this space, having proposed various PMBs on the same idea. Now is the moment where we might see what comes of all that work, and how much revenue it could potentially yield.
Lowering fees that consumers and businesses pay: the government has previously signaled its intent to revise rules on the fees merchants pay when you swipe a credit card, as well as considering to lower the maximum interest that someone can charge on a loan before being considered criminal. While these are two very different issues and affect very different people, they fit together in the sense of the government can show it is lowering the costs of accessing financing services. Lenders and financial institutions may expect to see movement in this space as consultations on both issues have been underway for a while.
Financialization of housing: the government has also previously committed to review the way in which investors benefit on a tax basis from investments in housing, particularly large corporate landlords and Real Estate Investment Trusts. It is possible that this measure gets pushed off because of worries about the impact on investment in housing supply in the current environment (which is much different from a year ago). One holding pattern decision, may at least involve some form of consultation so that something starts before the next election. This choice will be interesting to watch.
Another area where we have not yet seen preparatory work, but which flows from the government’s 2021 platform, is the issue of how the tax system can help address the rise of contract and gig work, and improve access to things like Employment Insurance for workers in these situations. Some tentative work has been done in the trucking industry around a different but related issue, and this focus could be expanded more comprehensively. This is something other countries have also been working on and would fit in as part of a thematic on workers.
8) Deposit insurance
In the last number of weeks the global banking and financial system has been under stress as fast interest rate hikes take a bite on vulnerable pockets of risk. This has raised the question whether Canadians have enough insurance on their deposits (currently capped at $100,000 on eligible account types, per person, per institution)?
In Canada about 1 in 3 deposits (based on the last review from 2014-16) are beyond the threshold for coverage, which hasn’t changed in 18 years.
Source: Finance Canada
It is possible, as a first step, before any action is contemplated, the government launches a review of deposit insurance. Or gives itself the legislative power to temporarily increase insurance if needed. As I have posted before, the necessary legislative text can be borrowed from the government’s COVID-19 response legislation which included one such, albeit temporary, provision.
The last two things to watch, are items of personal items of interest. Whether or not they happen is less clear, but something for which I am hopeful.
9) Council of Economic Advisors?
Budget 2022 promised there would be further work done to create a Council of Economic Advisors. Similar to what exists in the United States, Australia and elsewhere.
This was in the 2021 Liberal platform and the Prime Minister’s mandate letter to Minister Freeland.
I think this is a really important long-term capability we need in order to deepen the relationship between governments of all stripes and the research community, as well as to help open up the many different departments involved in economic policy (not just Finance) to new ideas and creative thinking from the outside world.
Do we see any progress?
10) Making it easier for Canadians to get the benefits they are entitled to
I don’t expect this last one to happen but it would fill my heart with joy if it did. Millions of low and modest income Canadians miss out on benefits because our tax system uses an opt in design.
We have the data and ability to fix this. And the government committed, as far back as the 2020 Speech from the Throne, to make headway on it. So far nothing has really happened, from at least what can be seen on the outside.
Some progress here would be hugely worthwhile to help low income Canadians. And it would not be particularly inflationary – since making this happen will take years of work, and it is not about adding any new entitlements. It is simply good customer service. Something all politicians should be focused on.
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Not all of the things that I have outlined here will happen, nor even many of them. But they go to show you the kinds of issues that the government is likely contending with as it works through a very complex set of considerations. How those puts and takes play out is what budget making is all about.
In closing – spare a thought for the many hard working public servants, political staff and decision-makers who have toiled away, at great personal sacrifice, over the past many months to bring forward the Budget. The plan that will be presented on Tuesday is one that, in their view, will best serve the needs of Canadians, now and in the future. People may disagree with what they come up with in that plan, but we should all thank them for their service. It is truly a public service. It is this kind of work, and the dedication of the people who do it, that our public institutions rely on. An early, hats off to them.
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ABOUT THE AUTHOR:
Tyler Meredith - Tyler is a Founding Partner at Meredith Boessenkool Policy Advisors, and was for nearly seven years economic policy advisor to Canada’s governing party. He has been involved in helping craft a number of budgets and platforms. He is a senior fellow at the Munk School of Global Affairs and Public Policy, and also with Maytree.
The views and opinions expressed are those of the author and do not necessarily reflect the position of Air Quotes Media. Read more opinion contributions via QUOTES from Air Quotes Media.