2022 Fall Economic Statement: Prudent or not?

Finance Minister and Deputy Prime Minister, Chrystia Freeland, presented Thursday the government’s Fall Economic Statement (FES), an annual update of revenue and spending projections in the near term. In recent years, they have also tended to contain a plethora of new spending commitments.

This year, however, was meant to be different, as government officials lined up to vow fiscal prudence in the run up to its announcement.

Observers are divided on whether the update lived up to the promise of fiscal restraint. For some, the government resisted the political pressure to spend big. For others, there should have been more done to reduce the deficit.

A new fiscal reality

Massive spending during the pandemic and supply-chain disruptions have triggered rising inflation rates forcing central banks across the world to raise interest rates precipitously. Most economists expect a recession in 2023. The only question now is: how bad will it get?

From a fiscal perspective, the statement is an attempt to walk the line between reducing the deficit, while also helping vulnerable Canadians grapple with the rising cost of living and investing to boost economic productivity at a time of slow growth.

Freeland is also walking a political tightrope.

A political and fiscal tightrope

The government operates from a minority position, with the New Democratic Party (NDP) propping it up in exchange for expensive commitments like dental care.

Going into this week, NDP leader Jagmeet Singh wrote a letter calling on Prime Minister Justin Trudeau to address “corporate greed” and reform the employment insurance program, but no ultimatums were made.

While there is little expectation, the NDP would provoke an election by voting against the government on the FES, the government must be careful not to anger its left-wing partner by limiting spending too much.

The fate of Liz Truss, who’s own mini budget provoked such violent reactions from the market that she was thrown out of office, will ensure fiscal prudence is top of mind for Freeland.

Meanwhile, new Conservative leader Pierre Poilievre has done a remarkable job hammering the government on cost-of-living concerns, attracting voters from all over the political spectrum in the process.

In a letter addressed to Freeland on Sunday, the former Harper-era minister laid out his demands: no new taxes and no new spending without commensurate budget cuts.

The FES provides the first clues as to how the Liberals expect to fight back against Poilievre’s populist appeal.

Key Measures

• The statement includes $30.6 billion in new spending over the next six years and forecasted a deficit of $36.4 billion for the 2022-2023 fiscal year, down from the $52.8 billion Freeland's spring budget had projected.
• The Liberals are proposing a 2 percent tax corporate stock buybacks. The message is clear: the government wants to encourage companies to invest some of their record profits in things like research and development, and the energy transition, rather than goodies for investors like share buy-backs.
• The update included long-awaited details on the $15 billion Canada Growth Fund designed to spur investment in the transition to net zero. The Fund was first announced in last April’s budget but was criticized for the absence of details.
• In what is a direct response to the U.S. Inflation Reduction Act, the government will consult on the creation of two flagship measures, both of which a mirrored in the U.S. bill:

1. A new refundable Investment Tax Credit for Clean Technologies equal to 30 percent of the capital cost of investments in clean energy technology such as solar, small modular nuclear reactors, wind and hydro, wave and tidal power projects, electricity storage systems, low-carbon heat equipment, and industrial zero-emission vehicles
2. An Investment Tax Credit for Clean Hydrogen to support investments in clean hydrogen production.

• A promise to move forward on a previous commitment to the “swipe fees” credit card charge businesses
• Multiple housing benefits including:

1. A new refundable Multigenerational Home Renovation Tax Credit, which would provide up to $7,500 in support for constructing a secondary suite for a family member who is a senior or an adult with a disability
2. A new Tax-Free First Home Savings Account, which would give prospective first-time home buyers the ability to save up to $40,000
3. Doubling of the First-Time Home Buyers’ Tax Credit, which would provide up to $1,500 in direct support to home buyers, starting in 2022

• All Canada Student Loans and Canada Apprentice Loans will be made permanently interest-free—including those currently being repaid, at the cost of $2.7 billion
• To help the poorest Canadians cope with rising costs, the government will spend $4 billion to rework the Canada Workers Benefit (CWB), a refundable tax credit that tops up the incomes of about 3 million workers, so that “advanced payments” will automatically be issued to those eligible for the CWB.
• Doubling the previously announced GST tax credit for six months
• In support of its new immigration targets, the government is investing:

1. $1.6 billion over six years and $315 in ongoing funding to support the processing and settlement of new permanent residents
2. $50 million to address ongoing application backlogs, speed up processing, and allow for skilled newcomers to fill critical labour gaps faster

• $1.7 billion to compensate the supply managed sectors related impacted by the new North American Free Trade Agreement. Further details about the compensation will be made available in the coming weeks.

NATIONAL’s pan-Canadian Public Affairs team will continue to monitor related political developments on the FES, including potential implications for the Trudeau Government’s 2023 Budget.