March 24, 2023 | 14:36
Canadian Federal Budget Preview
The Federal government will table the FY23/24 budget on March 28th, setting out fiscal priorities for the years ahead. In the Fall Economic Statement, Ottawa estimated a $36.4 billion deficit for FY22/23 (1.3% of GDP) and a slightly smaller $30.6 billion shortfall for FY23/24. Those balances reflect a dramatic positive turn from the deep pandemic deficit that weighed in at almost 15% of GDP. Massive temporary spending measures have rolled off and, just as dramatically, the economic recovery and burst in inflation have lifted nominal GDP, incomes and tax revenues.
As it stands right now, there is probably some modest downside risk compared to the projections outlined in the Fall Economic Statement. While our current call for real GDP growth of 0.7% this year is consistent with Ottawa’s fall assumption, nominal growth is tracking slightly weaker, while interest rates are tracking somewhat higher (although the rate backdrop is changing rapidly heading into the budget). These impacts appear modest enough to keep the fiscal path close to what Ottawa laid out in the fall.
What we will see: Ottawa will surely lay out a downside fiscal scenario that provides a stress-test of how finances would look in a more significant recession. Finance, and many of the provinces, are making this common practice. The downside scenario presented in the fall update featured a recession-like 0.9% decline in real GDP in 2023, which came with a $52 billion deficit, or $22 billion deeper than the baseline for FY23/24. On the policy front, we’re almost certain to see some dedicated spending and/or tax credits aimed at the clean energy sector as a response to the measures in the U.S. Inflation Reduction Act. And, with the cost of living still a major issue, there could be some more highly-targeted relief measures.
What we won’t see: Wholesale fiscal stimulus is not the appropriate move at this stage, and the Finance Minister has acknowledged as much in recent weeks. While inflation has shown signs of cooling, the Bank of Canada remains in a dog fight with price and wage pressures, leaving measures like direct support payments (of which we saw more than $10 billion worth last year across the provinces) counterproductive. As such, net stimulus coming out of this budget should be very mild. From a bigger-picture perspective, note that federal program spending over the latest 12 months is running a hefty 26% above pre-COVID levels even after the largest temporary measures have fallen out. To be fair, the average price level in Canada is up about 13% over that period, and the population has expanded by another 4%, but we’re still seeing program spending hold above pre-COVID norms in real per-capita terms and as a share of GDP.
What we’ll be watching for: The timing of balanced budgets is always a focus, but we’ve been conditioned to not expect much on that front. That is, look for balanced budgets to remain a token feature of the fiscal plan a number of years down the road. On the policy front, there is always pre-budget chatter about potential tax changes, and this one is no different. Areas like the Alternative Minimum Tax and various tax ‘loopholes’ targeting higher-income Canadians look to be clearly in play. Other more contentious and wider-reaching areas like the capital gains inclusion rate and top marginal tax rate have been discussed in the media recently, and were part of the NDP platform, but also seem to be perennial members of the pre-budget rumour mill.
All told, and if the provincial budget season is any guide, this could be a relatively stable budget with a few policy tweaks.