Perspectives podcast: Breaking down the 2024 federal budget

Stephen Meurice: The Liberal government has just presented its 2024 federal budget. Much of its contents was already announced in the last couple of weeks. But there was still some news in it.

Rebekah Young: Budget 2024 delivered a pretty big spending package, much bigger than had been channeled, despite all the announcements ahead of time.

SM: That’s Rebekah Young, Scotiabank Economist and Head of Inclusion and Resilience Economics.  

RY: In a nutshell, spend like there’s no tomorrow, tax like there is.

SM: She’s joining us from Ottawa, where she spent the day reviewing this latest budget. Rebekah will speak with Armina Ligaya to break down the key takeaways Canadians need to know about the federal government’s spending plan. And what it might mean for the economy.

I’m Stephen Meurice and this is Perspectives. Now here’s Armina Ligaya.

Armina Ligaya: Thanks so much for joining us, Rebekah.

Rebekah Young: Thank you for having me.

AL: Yeah, thank you in particular because we are recording this at about 6 p.m. on Tuesday the 16th. And you got a look at the budget this morning and you've had the whole day to review it, all 300 pages of it. So maybe we'll start with looking at the different elements of the budget. There was a lot announced and they actually did take a different tact than they would have in previous years in terms of normally there'd be a lot of big reveals on budget day. And while there still were some, there was quite a lot telegraphed before. But why don't we just look at overall spending? What are the high points? How does how much was being announced in terms of spending compare to what you were expecting?

RY: So first of all, I would say I was pretty proud of myself because I got the net impact pretty much to a tee, which, quite frankly, shouldn't be surprising. There are many forecasters that were saying they're going to blow through their fiscal anchors because these levers are on or off. But I took a look at what they laid out in terms of their fiscal path before and the anchors, their kind of the rules they set for themselves, and said to myself, ‘There's no way that they're going to blow through these anchors in calm times, because only kind of a handful of basket case countries, quite frankly, in advanced economies actually set rules and then break them in in calm time.’ So, I cheated a bit by saying, ‘Yeah, the numbers may not look like they can make it, but they're going to make it one way or another.’ And that's essentially what we saw, is that they added on a whole whack of spending, but they offset that with a big chunk of what I would say, a big chunk of taxation, but also a big chunk of good luck. And so, we also saw an improvement in the economic forecast. So, if you recall last fall, there were still forecasters that were still pretty doomsday, they were kind of the last hangers on that said we're heading into a recession. And that pulled down the private sector average for growth outlook and that formed the basis for how the federal government forecasts its outlook. So we saw a good chunk of the spending also paid for by what we would call a windfall or good luck. So the economy churned out more output, more government revenues than otherwise anticipated and the government flipped around and spent that all. So at the end of the day, if you look at the path for deficits, if you look at the pa th for debt, they actually look almost identical to what they were back in the fall when we last got an update from the feds, except lots of moving pieces clearly, in terms of a great big fat spending package and a pretty big taxation package as well.

AL: I want to come back to the revenue in terms of, bigger economic growth, but then also taxation. It's a big one out of the budget. But I want to go back to the spending. What are some of the key buckets of spending that Canadians would be most interested in?

RY: Yeah. So, first of all, the number that you'll see in media is that this was a package that costed roughly 35 billion. So everything they announced on net was about 35 billion additional over the next five years. So taking us through to fiscal year 2029. But what the moving pieces there are that there was 56 billion in new spending measures and then offset with almost 22 billion in taxation measures. So when you look at that, you unpack that 56 billion – I went into budget day thinking that housing was going to be the centerpiece. So I was ready to kind of think about what they had announced in the weeks leading up and think about how critical this was and how we have to be careful about that spending. Well, I was pretty blown away that that was only about one fifth of all the new spending in there. So, I really had to adjust my kind of headspace that that actually isn't the centerpiece. It's one piece of a lot of spending. We knew military was going to be a big chunk, so that made up another big chunk. And rightly Indigenous spending was another big chunk. And so that was a sizable component. Then there was a bucket of what they called communities, really hard to kind of tease out. There wasn't necessarily one clear winner in there. I would say we knew that a down payment for pharmacare was coming and we saw a little bit of that. Perhaps a new measure that's been in the offing for quite a few years now was a new disability benefit. So they did launch that and that has a price tag of about 5 billion over the horizon. Then we do have a bucket that they call ‘Growing the Economy.’ And so that has some of the AI investments and a few other programs really around research type of investments. And then there's a generational component where they're really targeting youth. And so it's got student loan grant provisions, etc., etc.. A whole lot of small items adding up to a pretty big one. So, that kind of gives you a picture that it's really kind of spread across. And, quite frankly, I imagine many Canadians would find it hard not to find something within the budget that does impact them one way or another in that big $56 billion spending package.

AL: So that's all the spending that they're doing. And the big question, of course, is, ‘Okay, how are they going to pay for it?’ We already touched a little bit on that in terms of revenue in the form of taxes. Can you talk a little bit more about that? How are they going to pay for this? What about the tax measures that they have announced that are new?

RY: Yeah. So that 56 billion, a big chunk of it is that good luck, so better economic performance is going to pay for half of it. The other half are taxation measures and so they've got a big chapter called ‘Tax Fairness.’ And what they do, the big bulk of that is around capital gains taxation, changes to that. So they're basically shifting that rate from one-half to two-thirds. So that's for both individuals and corporations. So for individuals that starts after $250,000. But that net impact essentially, I mentioned 20 odd billion, 21 billion, about 19 billion is from these taxation measures. Essentially what it is doing is taking private capital, putting it on government's balance sheets. And so, I think there are a whole host of ways that you can unpack that. And one of them clearly is this is yet another measure where what we see is private sector is a bit of an afterthought. The government is taking a very punitive approach over the past couple of years, looking at sectors that stand out above others and kind of cutting them off at the at the neck, so to speak. And so, it is sending this quite negative tone that that we're not necessarily as open for business as we might want to be and in fact, as we need to be. Because if you look at some of the big ambitions that the federal government wants to deliver on, we know in this budget, it's around its housing plan, earlier we've had a lot of investments in the green transition. Well, a lot of the success in achieving those outcomes really relies on crowding in private capital to get them where they need to go. Because keep in mind, government doesn't generate wealth. A lot of this activity, they don't execute themselves. They need private sector players. They need private capital in. And so, when they take these broad-based measures, kind of swatting at private capital in that way and in fact, kind of siphoning it off balance sheets in the private sector, bringing it on to government books, that really has a pretty negative implication. And I think another channel really is distortionary. So now we've got a really patchwork approach to taxation, whether it's personal income, corporate, but now within corporate, lots of different moving pieces that creates what we call inefficiencies or distortions. And so, we may not be getting the best kind of value out of decision making when we are looking, when we want private sector to allocate capital, make business investments.

AL: So just quickly, you mentioned capital gains in there, can you give us a primer on what that is?

RY: Yeah. So essentially, a capital gain occurs when you sell an asset for more than you paid. And the inclusion rate or the tax rate is the portion of that gain that is taxable. So basically, that inclusion rate, they announced they're going to shift it from 50% to two thirds. So that is a pretty big increase. And quite frankly, at a time when we need to encourage more investment. So, on one level it increases more friction. So, an individual corporation might decide to hold on to assets longer than what might otherwise be economically efficient. But it also kind of discourages the types of investments that would incur profits or some years losses that we need more of that type of risk taking in our economy overall. And so these types of measures would at face value discourage that. But importantly, also, capital is mobile. And so, it increases the taxation on capital. And so, the risk is that we see more of that capital flowing outside of the country. And we've heard kind of this debate playing out, for example, in public media about why don't we have more pension capital investments in Canada, for example. And should we force it, should we incentivize it? And yet we have measures like this that are clearly punitive to an investment in Canada. So it is a big change. And, the signal probably doesn't sit well with a lot of folks in terms of what it means for the competitiveness and agility of Canada's landscape.

AL: But to clarify, capital gains on the sale of a principal residence like the home that you live in will remain exempt.

RY: Yes, that will remain exempt. We do see that they're fulfilling earlier promises that they're going to crack down on house flipping. So anything that looks like a purchase other than your own use that's flipped within a year, they are going to be cracking down on that through these channels. But otherwise they haven't changed the exemptions for homes that you reside in.

AL: And I'm wondering, following up on that, the impact of these tax measures on productivity, which has been brought up again and again, is a key issue for the economy. And frankly, a key element required to tackle inflation.

RY: That’s a good question, and I would say the one thing that really isn't coming out loud and clear in this budget or quite frankly, the government, is around the urgency of productivity. And so, we heard a few weeks ago the senior deputy governor of the Bank of Canada coming out and saying, ‘It's time to break the glass.’ And everyone, I think, can rightly admit we know it's a problem. We don't know what to do. But we don't see that urgency. We see kind of pockets of measures here and there. And to be fair, there are pockets of measures in this budget around research and development. And, we also have in the pipeline a bunch of the green transition stuff. So we've got these pockets of stuff in the works, really diluted by other spending. But we don't have this overarching framework that essentially says like, ‘Look, pretty much everything we do should be done through the filter of how is this going to enhance the welfare of Canadians over the medium term?’ And that's really what we need right now is like a laser-focused filter on decision making on where to allocate limited or what should be limited public dollars to that end because that at the end of the day is what's going to secure higher productivity and better gains for welfare. So we really, again, didn't see that in the budget. And, we saw measures that sent the opposite signal from what is needed right now.

AL: It's a good segue into looking at the broader economic impact of this particular budget. What, in your view, will be the impact in both the near-term and the long term?

RY: So in the near term, obviously, we're still grappling with where is the economy heading, what's going to happen to inflation, and consequently when's that first interest rate cut coming? Everyone is wondering about that. And so heading into the budget literally hours before the budget was tabled, we did have another soft inflation print. I think there is a risk of complacency. We saw markets really light up and increase the likelihood or at least market call for first hikes coming in June or July. But on the margin, this budget did a couple of things. Like first of all, I mentioned just a whole whack of spending and probably more than most had anticipated. I would calculate easily .4 percentage points of GDP added this year and next into the system. And that's net because another complicating factor is that they're doing kind of a give with one hand and take with another. So they're actually adding about .7 percentage points into Canadian pockets while they are taking out from other parts of the economy. So it's really adding to this uncertainty. But on net on the margin, adding to fiscal support and those numbers come on top of what provinces announced over the last couple of weeks in their own budget. So they added on about another 44 billion odd into new spending over this short period of time. And so I think that those combination of factors certainly suggest growth. But at a time where we're kind of walking this delicate line that, yes, inflation is softening and yes, we've had a good period of good prints there. And job growth is slowly cooling kind of in an orderly fashion. But we're clearly not out of the woods yet. And another big factor kind of risk on the near-term horizon is obviously in housing markets. And so shelter costs are still pretty hot and no sign of immediate cooling despite where the work that interest rates have done. And so the budget in the housing plan does add some incremental demand measures. So they're targeting first time younger home buyers with longer amortization and some other tools to leverage higher down payments. And so that on the margin is going to add to this incremental demand that quite frankly, sitting on the sidelines that no one really knows how big it is. But we've got a sense that for a whole host of reasons that you've discussed on other podcasts is just waiting to jump into the market. And spring, summer are normally the housing market season for Canada. So it is this heightened risk of how big is that? How is it going to play out? And now you've got a budget that on the margins adds a bit more to that demand. And so, on net, I would say net positive for growth. But when you look at, the implications and the risk, it adds, it does add kind of on the margins, that risk that not just on when is that first rate cut, but also then if and when we do get that first rate cut, the risk that that floor may stay higher than we may otherwise anticipate, because they have certainly underpinned fiscal spending in the near term, well out into the future. And the other factor I would say is that this is just the start. And so, we are heading into elections within at the latest October 2025, I would say this very much looks like a trial balloon that they're looking at. Because this is a big spending package and their current fiscal anchors don't give them a whole lot more space to do another pre-election budget. So, I think fiscal activism is here to stay until we get a new mandate, either this government or a new one. And then all rules are reset.

AL: So many different elements and factors to consider and so many takeaways from budget. As you walk away after a long day of delving into the budget, what is the main thing you're taking away?

RY: I walk away a little more worried that we haven't quite figured out how to secure stronger growth over the medium term. I do see very real needs, very real pressures, big structural shortfalls, whether it's things like, health care, long term care. And I see the need for big, bold investments in things like housing, where the shortfalls are so great and they have links to productivity, as well as the Green transition to meet our target. So I see the need for these, but I see that we, you know in order to meet these ambitions, we need a bunch of factors. We do need stronger growth and we need private sector partners alongside. And so I don't see that cohesive or kind of coherent or compelling agenda there. And I do think also, it's not just about – you know, I think businesses get it. I think they know that we need an agenda. Nobody has quite the answer. But I think we also need to figure out how to have that discourse at a broader public level. That Canadians, we need that a way to look at productivity, to unpack it in a way that an agenda is compelling to Canadians. And they can see their own futures. They can see why it matters that there may be a little bit of, a yes, we need to invest now for or tighten our belts now for better outcomes down the road. And I think we're nowhere near that just yet.

AL: Thank you very much, Rebekah, for joining us to break it all down for us.

RY: Thank you.

AL: I've been speaking with Rebekah Young, Vice President and Head of Inclusion and Resilience Economics at Scotiabank.