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On Tuesday, the federal government will table its 2023 budget. Armina Ligaya chats with Rebekah Young, Vice President and Head of Inclusion and Resilience Economics at Scotiabank, to explore what key themes are predicted, where we might see spending, how much and why —and go over some remaining question marks.
Key moments this episode:
00:26 — The four big themes we’re likely to see
1:40 — How this year’s budget may differ from last year
3:16 — Unpacking the main themes – affordability
6:47 — What will this new spending mean for the bottom line?
8:37 — What will we see in regards to the green economy?
9:43 — What is the Inflation Reduction Act and how does it affect Canada?
12:15 — How will healthcare spending play into the budget?
14:18 — Is there anything we might not see that we expected to?
16:30 — Rebekah gives us some insight into the budget day media lock up
Stephen Meurice: On Tuesday the federal government will table its 2023 budget. And with everything that’s going on – stubborn inflation, high interest rates, a big-spending government south of the border – the challenges Ottawa faces are many. That said, those who follow along closely are thankfully not anticipating any shocks.
Rebekah Young: I think we’ll give the government points for predictability. I don’t think we’ll see any surprises.
SM: That’s our guest today, Rebekah Young
RY: We’ve got four big themes we’re likely to see in the budget. We’ve heard that green investment’s going to be a big theme. Health care is going to be a big theme. And fiscal restraint. Then we also heard the Prime Minister come forward and say, oh, we’re going to also see affordability measures.
SM: Rebekah is the Vice President and Head of Inclusion and Resilience Economics at Scotiabank. She’s back to explain how we may see those key themes play into the budget. She’ll be telling Armina Ligaya from our Perspectives Newsroom team where we might see spending, how much and why. And touching on a few remaining question marks. I’m Stephen Meurice and this is Perspectives.
Armina Ligaya: Rebekah, thanks for coming back on the show.
RY: Thanks for inviting me.
AL: So last year around this time, you came on to the show about the last federal budget. It was late at night in an Ottawa hotel room, after you’d been in the press lockup all day. So hopefully today you’re a little bit more well rested, well hydrated.
RY: [laughs] Absolutely.
AL: So as we heard in the intro, the 2023 federal budget is set to be unveiled this coming Tuesday. I know you already touched on the key themes — green investment, health care, fiscal restraint and affordability — but before we unpack each of those, how do you think this year’s budget will differ from last year’s?
RY: One of the big similarities I’ll start with, first of all, before getting to the differences, is that we’ve had now a series of three years basically where the outlook, the economic outlook is uncertain for different reasons. And so all of a sudden, yet again, we thought we were getting pretty close to getting through this year of a slowdown. And we thought that things should start to normalize by the end of this year. Well, of course, now there’s lots of market turmoil, lots more uncertainty, lots more reason to be cautious generally in policymaking and on both sides, of doing too much or doing too little. But the common theme we’re going to see lots of sort of question marks around uncertainty and baselines and downside scenarios. So I think we’re going to see more of that. Now, I think what’s going to be different about this budget is that the government won’t have the same cushions of windfalls. So we’ve had basically a year and a half of very conservative budgeting, very conservative forecasting, kind of expecting or planning for the worst-case scenarios and then things turning out better, especially for government revenues. This has given them big amounts of money, in some cases close to 80 to $100 billion over a five-year planning horizon, of windfall revenues that they hadn’t expected to spend. And that’s allowed them then to turn around and spend most of it. Now, what’s different is that really we don’t likely expect that much of a windfall in this budget. We do still expect them to spend something, but they’re not going to have that big cushion or that big margin to be able to spend a lot without materially deteriorating the bottom line.
AL: So why don’t we start to unpack each of the themes that they’ve signaled. So probably the biggest issue that all eyes will be on this budget looking for help on is the cost of living. So the Prime Minister said recently the budget will, to use his words, include direct help for Canadians on the affordability front. However, as we know and we’ve discussed in past episodes, the government giving relief for individuals, like financial assistance, can also sometimes actually increase inflation. So how will they balance those things in this budget, in your view?
RY: To be honest, I don’t think that they’ll be particularly restrained. I think that they’ll take a combination of approaches. It’s that, one, there’s already a lot in the pipeline, not only within the federal government’s mandate, but in provinces. And just to give a few examples of what’s still in the pipeline, what’s still flowing to Canadian pocket books over the next couple of quarters, is what was announced just as recently as the fall update in late fall, where they announced, for example, advance payments of the Canada Workers Benefit. So that’s starting to flow this summer. We know also they doubled the GST rebate and that’s been flowing. I put an asterisk there, I suspect that’s something that they’ll be tempted to extend beyond its expiration later this spring. But we also have the universal childcare that for folks with children in daycare right now, that is a substantial relief to those that do find a place and some put that number somewhere in the order of about $2,500 a month for some families. So that can be a pretty big relief for some Canadians. So those are just to name a few, but we also have provinces providing one-off rebates. And I should also mention the Canada Housing Benefit, that’s something that was announced in the fall and, you know, was recently opened for applicants for low-income renters. So there are a whole series of these measures that the federal government has already announced and are still flowing and are still going to be going into Canadians’ pocketbooks to support affordability. So I think they’re going to likely repackage, re-announce, re-underscore a number of these initiatives, while likely not avoiding the temptation of adding a couple on that will be fairly small. If you think of the GST rebate, that was about $2 billion. The Canada Housing Benefit top-up was about $1 billion. You know, quite frankly in this area those tend to be rounding errors unfortunately. So they get past the approval line fairly easily. And I think that in the context of elevated cost of living, that there certainly is that political pressure and that political cover to provide some of these relief measures.
AL: Mmm hmm, so you’re expecting that they’ll sort of reinforce re-highlight the various measures they’ve already announced on the affordability front, but not necessarily announce anything too big or too new?
RY: Yes and quite frankly, you have to be a bit of a forensic accountant to go through to figure out was this or wasn’t this announced before? And so, I think that we’ll see a whole slew of these items that will appear that they’re addressing affordability. You’d have to have read and memorized earlier pledges to know whether this is new or not. So I suspect that the bulk of what we see are going to be those types of measures. And then I think at the margin, we’ll see a couple of kind of extensions or top-ups to current tools they’re already using that are very targeted at lowest income Canadians. I don’t think they’ll be huge numbers, but they are kind of layering on to a pipeline of support that starts to add up once you layer in provincial support as well.
AL: Mmm hmm. So I want to ask a question about deficit and debt, talking about all of these measures. What will this mean for the bottom line?
RY: I think what we’ll see is a slight deterioration in the bottom line relative to what was set out in the fall, and recall in the fall they expected deficit spending somewhere in the order of minus one and a half percent of GDP this year. And actually heading into surplus territory by the end of the five-year horizon. I think we’ll still see that trend of reducing deficits, but we’ll probably see a bit of a step change. So I could say maybe somewhere in the -1.5 to -1.7 and just pad on to deficit spending over that horizon. But now keep in mind, we do have more downside risks, I would argue, on the economic outlook. So certainly that could change. What this will do for debt, which is something that, you know, in normal times, markets might look at, will again, it’ll slightly deteriorate what our debt as a share of GDP would look like. But again, it’s likely still to show this modestly trending downward trajectory. And I would say that is better than most peers. If you look, for example, at the U.S. that, you know, it’s just ratcheting up debt, but they are the U.S. and they are a reserve currency and they can do that. But Canada doesn’t have that benefit. So even though our debt, our net debt is much lower than most, if not all peers, we’ve just not got that luxury, especially in times where it is, you know, markets driven more by fear than fundamentals. So I think that it really does argue a prudent approach. And I really have to say that as much as we might say they shouldn’t add on, you know, a little bit of stimulus here and there, quite frankly, I don’t think that markets are going to have a kneejerk reaction. In fact, many won’t likely read beyond the headlines of the budget, and they will be much more absorbed by goings-on in other parts of the world.
AL: So another area you mentioned is the green economy. What do you think we’ll see in the budget in that regard?
RY: Well, we’ve seen Minister Freeland basically say what she wants to do is level the playing field with the US Inflation Reduction Act. Now, that’s probably the wrong name for what that budget bill really was because it really is, you know, a big chunk of it is around climate action. And so, whereas the US had been slow to move on this front, suddenly they came in in a really big way. Almost $400 billion over 10 years committed by the U.S. So a very, very big package. And not only is the number big, but over half of it is directed to businesses, to corporations through tax incentives and subsidies. So very, very targeted support to businesses and to specific sectors in particular. So it really is sending a chill into countries like Canada and European markets around how are we going to compete with this type of package? Even just on a competitive but also on a green competitiveness basis? So we know that Minister Freeland is looking at what can we do in a targeted fashion that will help in that space.
AL: I want to just go back to the Inflation Reduction Act, which to your point is sort of a misnomer for some of the things we’re talking about here. But for someone who’s not familiar with that and admittedly I don’t know all the details, can you explain a bit like what that’s sort of putting a chill into Canada, prompting it to worry about being able to compete?
RY: Yes, what we are seeing now is that the U.S. with, you know, its incentives, is that businesses, are starting to respond. So these measures were put in place earlier this year and already there are signs that businesses are starting to invest. Now, the risk for a country like Canada is that homegrown businesses start to look south of the border and see a more attractive playing field, whether it’s on the side of subsidies or more favorable tax treatment, and that they do relocate and start growing their businesses there. And we’re certainly seeing that play out. A very good example is around EV battery production. And I have to say Canada has had some wins in that space, but we need more wins. And that’s important, not just in terms of, you know, making sure businesses establish here and produce here in Canada versus the U.S. It’s not just a here or there question, but also it’s a Canadian specific problem that we just have really weak productivity, really weak business investment, even before looking at the green growth agenda. So I think that there is kind of a chance here, an opportunity that with this budget and with this green package, that we expect that the federal government really can both address some of that playing field evenness with the U.S. and also look at some of our own challenges around how do you really incent businesses to invest in Canada, whether it’s in green or other spaces. And so I would say we can expect to see a fairly substantial package. And if I had to put a number to it, a ballpark number, you know, I would say we could be looking at something in the order of $20 billion over that five-year planning horizon. Now that’s not obviously nearly as big as the U.S. and we wouldn’t expect it to be that big. But you have to remember, first of all, Canada and the federal government have already put down a big chunk of money. And I tabulate they’ve put down close to $40 billion over the last two years alone between various fiscal updates. But it hasn’t been particularly targeted and not targeted at business and business productivity. So I think we’re going to see a more targeted package, a little bit smaller, but likely really around that manufacturing, electric vehicle supply chain, battery. We’ve already seen a spattering of announcements, but I do expect that we’ll see a fairly big number that pops there.
AL: So another area which is on a lot of Canadians minds and also has been signal to be a focus for the budget is health care spending. There’s a lot of talk about increasing the money transfer to provinces. Can you catch us up a little bit on what’s been promised, what’s already on the books and how that may affect this upcoming budget?
RY: I think what we’ll see on health care is nothing new. So that will be an area where we shouldn’t be surprised or at least hopefully we’re not surprised because it is a big-ticket item, as we know that health care systems across the country are really facing strains. And provinces have been negotiating with the federal government. Now, they’re ask was really big. They were looking for $28 billion and growing additional transfers to provinces. Now, we know they didn’t get that. So a couple of weeks ago there was an announcement that there was an agreement reached which basically was packaged to look really big. It was $196 billion over 10 years, which sounds really big until you tease out how much was already expected anyway. And then the number shrinks to around $46 billion over 10 years. And so when you tease that out actually the incremental amounts that are expected to flow over the next couple of years are actually pretty small. But I think provinces are taking what they can get right now. I would say we’re probably seeing the federal government buying a couple of years. So, we’re not going to see this big structural hole in health care being fixed in this budget or even under this government mandate. It is going to be a bigger challenge that’s punted down the road and a little bit of money, I would say, if you want a bit of optimism around health care, is that they are using this money to buy better data. And so hopefully Canadians will be able to see, have a greater line of sight on what they’re getting for their tax dollars in health care. And that hopefully will provide some leverage going forward, and how do we get better results for the same amount of funds in health care.
AL: So not a lot of money on the health care front, but maybe a little bit more insight in the future.
RY: Exactly. We don’t expect any major new announcements on that front in the federal budget.
AL: Mmm hmm. So you said at the start, in general you’re not expecting any big surprises here. But is there anything that we likely won’t see but maybe based on past announcements we should have seen or might have expected to see?
RY: I think that there will be a number of measures that perhaps we should have expected to see but aren’t quite ready. And one of those measures, for example, is that the government had committed to announcing or launching a revamped Employment Insurance program that was intended to address some of the gaps exposed during the early days of the pandemic, to capture some gig workers that were outside of the old EI system. Now, my understanding is that’s not quite ready. And so one could argue, in fact, this is the time that you need that sort of program up and ready in the event that we do see a material deterioration in the outlook over the coming quarters, that you want that safety net automatic and you want it ready. But I don’t think it’s quite ready. So I think we might see language around it, you know, forthcoming sometime this year. But I don’t think we’ll necessarily see the details just yet. We also know that they’ve committed to a disability benefit and that’s caught up in the Senate. And so we’re still waiting. That’s probably a couple billion dollars. But because they don’t have yet legislation in place, we really don’t know yet what that number will cost. So those are two things that we can expect to come down the pipeline at some point. There are also a number of items that are off budget, so they wouldn’t appear in deficit spending, but they’re on government books that we’ll be watching carefully. We don’t necessarily expect to see movement there, but one of them is TMX. So we recall government brought this pipeline expansion onto their books. Now, there have been substantial overruns since then, and the government has said they’re not going to bring those overruns onto their books. But that’s a space that we’ll be watching carefully. And the second one are the business loans that were extended to small businesses in the early phases of the pandemic, and they’re expected to be repaid by the end of this year. Now, we know with the weakening outlook, there’s certainly a lot of pressure on either forgiveness or extension of some of those loans. So that’s a second area of these so-called off budget items that we’ll be watching carefully.
AL: Okay before we let you go, I am curious will you be back in the lock up this coming Tuesday?
RY: I will be in the lockup at this time, budget day. So it’s always a privilege to be invited into lockup and to get an early take to digest those 300 pages.
AL: Now, do they allow wine in the lockup? [laughs] To help sift through everything?
RY: [laughs] No. It’s a pretty grueling day. They do provide coffee, which comes in handy, but I liken it to doing a marathon in the sense that you’ve got kind of eight hours and you have to pace yourself and, you know, hope that you get to the finish line one way or another still standing.
AL: Rebekah, thanks for joining us. You’ve given us a lot to think about and watch for this Tuesday.
RY: Thank you for inviting me.
AL: I’ve been speaking with Rebekah Young, Vice President and Head of Inclusion and Resilience Economics at Scotiabank.
The Perspectives podcast is made by me, Armina Ligaya, Stephen Meurice and our producer Andrew Norton. Who believes there should be not only wine at the lockup, but also unlimited salad and breadsticks.