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The federal government’s latest budget has unleashed a wave of new spending – including measures to tackle Canada’s housing affordability problem – and forecasts “better-than-expected” revenues for government coffers.

Ottawa unveiled spending totalling $56.6 billion over the next five years as it plans to generate new revenues of about $25 billion on top of an expected $85.5 billion in revenue windfalls by the end of 2027.

“The fiscal path for the federal government looks better than we thought even heading into the budget last week, but especially relative to what we saw officially in December,” said Rebekah Young, Scotiabank Economics’ Director of Economic and Fiscal Policy, during the Perspectives podcast.

“So, very strong government revenue performance. We did see more spending today that offset some of that impact of stronger revenues, but overall better performance in terms of the fiscal path for Canada at the federal level.”

Young breaks down what she sees as the key takeaways of this budget. The first, she says, is that addressing housing affordability is a priority, with measures such as a new Tax-Free Savings Account for first-time home buyers.

The second takeaway is a lack of measures in the budget targeting growth that would change Canada’s medium-term outlook and future prosperity, she added.

The third big takeaway is the fiscal position or ideology of this government. “What we’re seeing is that they see more revenues, and they spend more revenues,” she said.

One highly anticipated item that was left off the table in this budget was commitments around pharmacare, she noted.

“More risks on the horizon and still not all the promises were unleashed in today's budget,” said Young. “So, we definitely have to watch that going forward.”

Read Scotiabank Economics’ full report on Federal Budget 2022.

Transcript:

Stephen Meurice: The Liberal government has just released their 2022 federal budget. 

So we're talking to economist Rebekah Young. She's the Director of Economic and Fiscal Policy at Scotiabank 

She spent the day in Ottawa reviewing this new budget and is going to give us a snapshot

of the main things we need to know.

Let's get started.

Rebekah, thank you so much for being on the show with us today.

Rebekah Young: Thank you for inviting me. 

SM: Okay, let's get right into it. We're recording this a little after five o'clock on Thursday the 7th, the day the federal government delivered their budget, and you've had a few hours or maybe quite a few hours, eight hours or 10 hours to review the new budget. So let's start off really briefly, what's your main takeaway? What's the one-line headline about budget 2022?

RY: I think the headline overall today is better than expected fiscal trajectories for Canada. 

SM: Okay, can you explain that to me just a little bit more? 

RY: Well, the fiscal path for the federal government looks better than we thought even heading into the budget last week but especially relative to what we saw officially in December. So very strong government revenue performance. We did see more spending today that offset some of that impact of stronger revenues but overall better performance in terms of the fiscal path for Canada at the federal level. I should note though, more risks on the horizon and still not all the promises were unleashed in today's budget. So, we definitely have to watch that going forward. 

SM: Okay, can I get you to break it down into, what are the three most significant points of this budget?

RY: I think importantly, the budget acknowledges some of the challenges that Canada faces over the medium term. So yes, of course, we're all thinking about inflation right now and it acknowledges that, if not underestimates it a bit because their forecasts are stale, but they also take the time to look out in the horizon. And I would say they give a pretty frank assessment of some of the challenges on housing supply, for example, they note that we need 3.9 million new homes over the next nine years and they also note the very dismal performance of GDP productivity growth potential over that medium-term horizon. So, I think acknowledging those challenges is the first step. They do provide substantial new supports behind that housing supply issue. And importantly they're also taking a carrot and stick approach, particularly to funding to municipalities. So, they're providing a $4 billion dollar amount over that horizon to municipalities on the condition that they adhere or implement some reforms, including around zoning regulations. So I think acknowledging the challenges, making some initial and quite substantial down payments towards addressing them is a positive step that we see in this budget.

SM: Okay, so housing is one of the main ones, obviously that's a big concern for everybody across the country to a skyrocketing price of housing, but what specifically does that new money do? I mean, generally you would think of housing as a provincial or even a municipal responsibility. How is the federal government addressing it this time? 

RY: The major new program is around an accelerator fund. So, this is funds that would be provided to municipalities, but with some conditions and the budget doesn't spell out exactly what those conditions are. But we certainly know as you point out that municipalities hold the reins on a lot of those types of regulations around zoning, for example, or densification. So what it really is, is saying, the Feds are going to promise some money, but only on the condition that it is used to accelerate the build that municipalities are otherwise wise responsible for. So, I think it is again, you know, a fresh approach to using that carrot stick approach to trying to get more build into the pipeline. But I should note there are also a number of new measures, they are smaller than the supply-side measures, these are around demand. And so you'll see a lot of coverage around first-time homebuyer incentives, tax credits. Now we have a new tax-free savings account for first time homebuyers. So again, the numbers aren't really big, but at the margin they do stoke demand. And that certainly isn't helpful from the longer-term perspective around affordability.

SM: Okay, so housing the first measure that stood out for you, what would the next one be?  

RY: Growth. So, everybody was looking for a growth agenda Minister Freeland talked about a growth agenda and we saw the makings of some new measures on the table that speak to growth in addition to that frank assessment that, hey, we've got a problem here over the medium term. So first of all two new arms length agencies that are going to be created, one was widely expected and that was around an innovation agency. So, it's the Canadian innovation agency. There's another one though that I say will probably raise some eyebrows. It is a new, I wouldn't call it a bank as much as a mechanism, but very much based on the model of the Canada infrastructure bank, that would provide limited public investment to leverage private sector investment. So, they put a ratio that one public dollar would raise three private dollars in capital investment towards a resilience agenda. So it is quite vague, it's built on a model that we've seen before and had a lot of false starts and it's, you know, slow to get off the ground. So overall some acknowledgement that growth is a challenge. Several new measures on the table, but it will be some time before we see whether these actually come to fruition and provide the sort of growth impetus that we really need.

SM: Okay, a growth agenda or lack thereof as a second point. And what would be your third big takeaway? 

RY: A third big takeaway would be more looking at what the fiscal position or fiscal ideology of this government, I say, new government, new in the sense that they are under a new mandate, they have now a new pact with the NDP government, I would say not a lot of surprises on that front. So if you're in the markets looking at what Canada might do from a bond supply issuance perspective, we're seeing a bit more of the same in that the government sees stronger revenue performance, they see more dollars in and they spend more and that gets masked by the revenue performance. I would say give them a few marks for introducing a number of measures including a strategic review that would reallocate bottom priorities to top priorities to pay for some of this and a few other reallocation measures within the budget. So they are making an effort to fund it with some existing resources, but that will take time. And of course we all know now that they have put on the table the bank taxes, so the surtax on banks and insurance companies. A bit smaller than was anticipated, so the surtax is 1.5% points, not the 3 percentage points that was campaigned on, but there's also the dividend recovery that's there on the table. So a bit of a tax grab there and distortionary in terms of what it does for the business investment landscape, but again, bottom line, a bit more of the same, what we're seeing is that they see more revenues and they spend more revenues. And I think that given the assumptions and the stale assumptions, we could very well see more revenues coming in in the next year. So given high nominal growth projections that we could very well expect them to spend.

SM: So what's not on the table?

RY: There is one item that we were all watching carefully for that was not in the budget, which was pharmacare. So we did see that dental care made it into the budget. And so a National Dental Care Program is now in the books and that is in the fiscal framework now. But we really didn't see any commitments around pharmacare. So we know that that is very likely to be coming. It's in the pipeline. It just wasn't tabled today. And that is a big-ticket item that once up and fully running that could cost in the order of $10 billion a year. So I think we need to stay tuned for that pressure coming down the pipeline. 

SM: So how much new spending are we looking at overall versus last year's budget? 

RY: Well, if you can follow the math, basically, they've announced about $56 billion in new spending. They plan to raise new revenues of about $25 billion. And they've had $85 billion in revenue windfalls. So, you know, a bit of a complication, a bit of a kind of a shell game, but to be fair there fairly transparent, you just have to really follow those numbers. And so at the end of the day, they expect to see roughly $50 billion less in deficit spending needs over the next five years than they had anticipated in December. But there are lots of moving pieces behind that. 

SM: You mentioned the new bank tax. Are there any other tax changes that people should be aware of? 

RY: There are a host of taxation measures. I would say another headline measure is a tax cut for small businesses and so we know that small businesses in Canada have a more favourable tax rate that will be phased out at a higher threshold. And so the idea is to remove that disincentive to growth among Canadian small and medium-sized enterprise, it is fairly broad based but that is one that certainly will make a notable difference too, businesses that fall within that bracket that's now been open wider. 

SM: Okay, and one last question inflation has been on everybody's minds or at least everybody is aware of it, does this budget do anything to try to address that or does all that new spending more money in the economy end up exacerbating the problem. 

RY: I think, given the context right now, the budget does the only thing it really could do in the near term with respect of inflation which was not to do anything. And so that was also another relief that we didn't see them, you know, feeling compelled to do something to offset in a broad-based manner the impacts on Canadian households. Now there are a few measures in there that I think are important in a very targeted fashion. For example, there is a Canada home benefit that really targets low-income Canadians that are facing challenges with housing affordability. But that is very small, very targeted, a $500 payment to these, you know, very small subset of Canadian households. So that's important. But otherwise the Federal Finance Department has stepped back and so you know, it's really up to the Bank of Canada now to step in to try to rein in inflation and quite frankly over the medium term where some of these other spending measures are built, in that's way too far off in the horizon to really impact where inflation is today. 

SM: Well, I think we'll leave it there. Rebekah, thanks so much for giving us that super focused summary of what happened in Ottawa today. We really appreciate you joining us. 

RY: My pleasure. Thank you. 

SM: I've been speaking with Rebekah Young, Director of Economic and Fiscal Policy at Scotiabank. You've been listening to perspectives. Please follow and rate us wherever you listen to your podcasts. For a transcript of this episode, visit our website at Scotiabank.com/perspectives. We'll see you next time