The Federal Budget 2021 tabled this week is ambitious, providing ample fiscal stimulus for businesses and households to weather the effects of the pandemic while proposing $100 billion in new spending over the next three years to help shape the post-pandemic economy, a Scotiabank Economics report says.
The new spending — best characterized as a “shotgun blast” — provides for a broad range of measures aimed at raising potential output through economic inclusion, green transition and encouraging business investment, and highlights the plan for national $10 a day childcare as a key objective. Some of the planned spending is offset by new revenue measures, but strong growth and a rapid unwinding of fiscal stimulus programs are expected to set the debt-to-GDP ratio on a downward trajectory next year, the report notes.
“This will be a commendable achievement if it occurs. Equally important, Canada will remain at the bottom of the G7 pack from a general government net debt perspective,” Scotiabank’s Chief Economist Jean-François Perrault wrote in the report.
From a macroeconomic viewpoint, Perrault says, proposed spending is in line with the federal government’s Fall Economic Statement and is unlikely to significantly change Scotiabank economists’ forecast for the Canadian economy this year or next.
To achieve a national $10-a-day childcare plan, the government is committing $30 billion over the next five years. While Scotiabank supports this plan, Perrault cautions that national daycare is likely to be slowed by negotiations with the provinces and might need to be complemented by measures to ease the financial burden of care shorter term.
To support business activity, the government proposes committing more than $16 billion over five years, with $3.7 billion being spent this year to help hard-hit businesses. Further out, proposals include strategic investments to help reduce greenhouse gas emissions, accelerate the industrial transformation, and move small to mid-sized businesses into the digital age.
Compared with the government’s fall projections, the $155-billion deficit expected in fiscal 2022 is larger in absolute terms but represents a smaller portion of forecast nominal GDP. The increase since November largely reflects nearly $50 billion in new policy initiatives, with a partial offset from a $16-billion improvement in the economic and fiscal backdrop since then. Outer-year fiscal shortfall projections likewise account for more modest shares of national output.
Debt levels are expected to progress on a more muted path, with Ottawa now anticipating net debt-to-GDP ratio to hit 51.2% in fiscal 2022 and decline in each successive fiscal year, compared with a steady escalation toward 58% through 2024 forecast in November 2020.
Other key budget measures include:
- Earmarking new funding to ease accessibility to Employment Insurance and increase the duration of sick benefits.
- Increasing the Canada Workers Benefit.
- Raising Old Age Security payments by $12 billion over the next five years.
- Increasing affordable housing, by adding $1.5 billion to the Rapid Housing Initiative and moving forward with plans for a 1% tax on owners of vacant or underused residential real estate who are not Canadian citizens or permanent residents.
- Bringing in new tax measures such as limiting the amount of interest certain businesses can deduct; luxury taxes on high-priced cars, personal aircraft and boats; and improving duty and tax collection on imported goods, which could add $8.3 billion to Federal coffers in the next five years.
To read the full Scotiabank Economics report on the federal 2021-22 budget click here.