National Post (National Edition)
Fiscal winter is on its way
But Freeland's plan remains unconvincing
Federal budgets are where predictions go to die, so treat this year's fall economic statement with the skepticism it deserves.
The fiscal update reveals that revenues were $40 billion higher than were projected in the April budget — less than six months ago. It also suggests that the budget will be back in surplus in the 2027-28 fiscal year.
The failure to correctly forecast income tax receipts over the past six months indicates that looking ahead five years may not be an exact science.
Still, for the first time, this Liberal government has suggested that it will eliminate the deficit, which is some kind of progress.
The main message from Finance Minister Chrystia Freeland was that winter is coming, in the form of an economic slowdown, but that “there are warmer days ahead.”
The subtext was that Canada faces huge challenges creating a “real, robust industrial policy,” as the world transitions from fossil fuels and nascent, fast-growing industries make investment decisions that will have generational consequences.
The sense one is left with after reading the fiscal update is that it might be a good idea to keep your parka handy — those warmer days may be some way off.
On the one hand, the fall statement was advertised as a prudent package of measures, designed to allow for flexibility should the slowdown that is already besetting the Canadian economy prove more damaging than anticipated.
On the other, it was aimed at promoting higher levels of investment in the medium term to make Canada more competitive.
It was not convincing on either front.
Freeland said the government would not make the Bank of Canada's fight against inflation harder by boosting spending. Yet the update reveals the government will spend nearly half of its net $30-billion windfall, showing all the restraint of a “Supermarket Sweep” contestant loading up his trolley.
On the investment front, officials said that while the United States is seeing business investment that's three per cent above pre-pandemic levels, Canada is still nearly two per cent below 2020 levels.
While emphasizing the need to address the Biden administration's US$370-billion (C$508-billion) Inflation Reduction Act (IRA) — what one senior official referred to as a “gravitational black hole” — the fiscal update also introduced a two per cent tax on corporate share buybacks.
Hence, while there is a clear commitment to creating a response to the massive United States industrial policy, at the same time the government is imposing a new tax on businesses. Economically, it doesn't make sense, particularly when you layer on top the fact that Canada has a carbon tax and the U.S. does not.
Politically though, it will appeal to the Liberals' partners in the NDP, as Freeland signalled in her use of language: “To make sure that large corporations pay their fair share.”
(For the record, officials said the attraction was not the $2 billion in new revenue; instead, it was an attempt to “tilt the balance” into investing capital into productive capacity, rather than simply returning it to shareholders — a gamble that might work, if the capital ever reaches Canada in the first place).
For all Freeland's talk that the U.S. has moved “from a Buy American to a Buy North American policy,” this shift is primarily in critical minerals and electric cars.
Officials conceded that the bulk of the IRA's incentives are available exclusively in the U.S. — a massive lure for mobile capital looking to invest in hydrogen, carbon capture technologies and clean fuels.
There is almost a sense of desperation in government policy circles that U.S. President Joe Biden's IRA is a game-changer that will see Canada left behind — hence the alphabet soup of growth funds and investment tax credits, with details and funding to follow, in the hope that something, anything, sticks.
We clearly cannot compete with the Americans on scale, so Canada has to be smart. By all accounts, we have world-beating industries like agri-tech that should be the focus of the firepower that we have. Yet much of our innovation infrastructure is not very innovative and it defies all efforts at reform, which would inevitably cut funding from many current recipients.
The outlook is not all doom and gloom. Canada is in decent shape by most measures.
Interest rates are 200 basis points higher than predicted in the budget and are expected to peak at 3.8 per cent in the first half of 2023. And with nominal GDP growth forecast at 2.6 per cent next year, the conditions are ripe for trouble ahead.
Public debt charges next year are predicted to be $43.3 billion, the largest single item in the federal budget apart from the Canada Health Transfer. But they are still a fraction of what they were in the mid1990s as a percentage of GDP (1.5 per cent versus 6.5 per cent).
The Department of Finance is not predicting a slowdown comparable to past recessions — a peak-to-trough dip in economic output of 1.6 per cent, versus 4.4 per cent during the 2008 financial crisis.
Officials said a tight labour market, a substantial personal savings bumper and strong commodity prices have put a floor under Canada's economy.
However, it is not clear that there is enough in the fiscal update that will materially help Canada's efforts to escape the gravitational pull of Biden's hundreds of billions of dollars in clean energy subsidies.
Freeland quoted Prime Minister Wilfrid Laurier, who in 1903 said of the transcontinental railway that a transformation was going on in the country that “would be folly to ignore and a crime to overlook.”
“Today, we are likewise at a pivotal moment,” Freeland said.
It certainly feels like the government has pivoted — it has doubled the national debt in seven years but is now projecting a budget surplus; it has ignored competitiveness and business investment for most of its time in office but now acknowledges it as “Canada's economic Achilles heel.”
There is a belated, and panicked, recognition that something must be done — and since the measures laid out in the fiscal update are something, we should be reassured.
But a reminder: budgets and fall statements are about as reliable as political campaign speeches — that is, not very.