Freeland promises ambitious goals and fiscal restraint
The federal government is set to unveil its budget on Tuesday, which aims to address Canada's competitiveness in the clean energy transition while also providing support for Canadians struggling with affordability.
Finance Minister Chrystia Freeland has promised to deliver on both fronts, but with a slowing economy and concerns over the government's fiscal restraint, it's going to be a challenging balancing act, as per Canadian economy experts.
At the same time, the budget is expected to provide relief to Canadians who are facing affordability challenges. This could include measures to address housing affordability, support for child care, and assistance for those struggling with student debt.
On March 14, the Canadian Housing and Renewal Association (CHRA) sent a letter to Freeland, outlining its priorities for addressing the ongoing housing and affordability crises in Canada.
As Budget 2023 approaches, CHRA has emphasized the need for the government to take bold action to make life fairer, more inclusive, and more affordable for Canadians across the country. The organization recognizes that addressing Canada's housing shortfalls will require ongoing coordination and collaboration, and the recommendations outlined in the letter represent important steps toward achieving that goal.
According to Randall Bartlett, senior director of Canadian economics at Desjardins, “It's going to be very tricky for the federal government.”
The budget is expected to include measures to support Canada's transition to clean energy, including investments in electric vehicle infrastructure, green technology research and development, and funding for renewable energy projects.
One key challenge for the government will be to find ways to pay for these measures while also keeping the budget fiscally restrained. This is particularly challenging given the slowing Canadian economy, which is expected to weigh on government coffers.
Despite these challenges, the government has signaled its commitment to delivering a budget that meets the needs of Canadians while also positioning Canada for success in the clean energy transition.
It is anticipated that the Liberals will make significant investments in Canada's clean energy transition to ensure that it remains competitive with the United States, which is implementing its own aggressive measures.
Last August, US President Joe Biden signed the Inflation Reduction Act, which allocates nearly US$400 billion towards a range of initiatives, such as critical minerals, battery manufacturing, electric vehicles, clean electricity, and hydrogen.
In addition, Ottawa has committed to investing heavily in healthcare. It has recently signed 10-year funding agreements with provinces on healthcare transfers, and these expenditures are expected to be included in the upcoming budget.
Given that the cost of living is still a major economic issue for many Canadians, the Liberals have indicated that the budget will include new measures to improve affordability.
According to Freeland, in the upcoming weeks, the government plans to provide specific relief to those Canadians who are most severely impacted by the rising prices, particularly the most vulnerable members of the community. This relief will be targeted to address the impact of inflation. She made this statement during an event in Oshawa, Ontario on Monday.
With economists forecasting that Canada could enter a recession this year due to high-interest rates weighing on the economy, the federal government must strike a balance between its big-ticket spending priorities and the uncertain economic outlook.
Since March 2022, the Bank of Canada has aggressively raised interest rates to tackle high inflation, a move that could dampen spending in the economy. As global price pressures ease, inflation has started to slow down, dropping from 8.1% in the summer to 5.2% in February.
However, despite this decline in inflation, a slowing economy will likely result in reduced government revenues to finance spending.
According to a report by Desjardins, new spending measures alone would not necessarily lead to unsustainable federal finances. However, if significant new spending is coupled with a worse-than-expected economic downturn, it could spell trouble for the government.
“Planning for an optimistic future and spending accordingly now could lead to very challenging circumstances going forward,” Bartlett said.
The federal government is at risk of exacerbating inflation with excessive spending, which would make the Bank of Canada's efforts to cool down inflation more difficult. However, Freeland has made it clear that the government will not engage in such excessive spending, noting that it cannot compensate all Canadians for the rise in prices.
According to Bartlett, the federal government has done well so far in balancing the need to assist low-income Canadians while avoiding adding fuel to the fire.
“My concern is this that (if) they continue to layer this on top of additional spending for other initiatives ... it's not only going to make potentially the Bank of Canada's job more challenging, but it's also going to just increase the size of the deficit at a time when the economic outlook is very uncertain,” he said.
There is uncertainty regarding how the government will handle tax policy in this year's budget. Although some policy experts believe that increasing tax revenues could help stabilize federal finances, others, like Bartlett, think raising taxes could be challenging for the government to sell to Canadians.
The government has had mixed results in some of its key investment areas, such as its national housing strategy, which could further complicate the issue. A shadow budget developed by the C.D. Howe Institute, an economic think tank, suggested increasing the GST tax rate.
“If we continue to see increased spending, and that requires tax increases to afford that spending, there's going to be ... increased scrutiny by the public on whether or not we're getting the bang for the buck,” Bartlett said.
Facing pressure from the NDP
The Liberal government is facing pressure from the New Democratic Party (NDP) to address other priorities in the upcoming budget. As part of the parties' supply-and-confidence agreement, the NDP agreed to support the minority government in key votes until 2025, including on federal budgets, in exchange for progress on shared priorities.
NDP Leader Jagmeet Singh has said he wants to see the government extend the six-month boost to the GST rebate, which temporarily doubled the amount people received, and provide federal funding for school lunches.
The Liberals have already committed to creating a federally funded dental care program and passing legislation on a national pharmacare program, although progress on the latter has been slow.
