Feds focus on boosting competitiveness, deficit rising to $19.6B in 2019-20
Published Wednesday, November 21, 2018 4:15AM EST
Last Updated Wednesday, November 21, 2018 6:54PM EST
OTTAWA -- The federal government is going to go deeper into deficit in the coming years as it tries to encourage Canadian businesses to innovate.
While the economy continues to grow, a changed economic landscape in the United States and new policy measures that the governing Liberals are undertaking are pushing Canada further into the red.
In the 2019-20 fiscal year, the federal deficit is projected to increase by nearly $2 billion to $19.6 billion, up from the $17.8 billion projected for that year prior to today’s fall economic update.
Previously, the deficit in 2019-20 was to be less than the 2018-19 deficit of $18.1 billion, though that is no longer the case. The fall economic statement tabled Wednesday includes $17.6 billion in new spending over six years.
The majority of this new spending— just over $16.4 billion of it—is being spent in an attempt to mitigate the impacts of the U.S. corporate tax cuts that are making American businesses more competitive.
This new approach includes three targeted incentives to Canadian companies that are meant to boost business confidence and spur competitiveness in the short-term:
- allow manufacturers and producers of goods to immediately write-off the cost of machinery and equipment;
- forgive the compete cost of any clean energy equipment; and
- permit businesses of all sizes and sectors to write off a larger share of cost of new assets.
Delivering his speech on the fall economic statement in the House of Commons, Morneau cited global uncertainty tied to ongoing trade disputes and spoke directly to the pressure to match U.S. President Donald Trump’s tax cuts, which he described as aggressive.
Morneau said that if Canada had gone the corporate tax cut route it would “add tens of billions in new debt… do more to worsen income inequality in Canada than improve it, and it could make the services that millions of Canadians depend on less affordable.”
The Finance Department says that these new measures will help the overall tax rate on new business investment fall to 13.8 per cent, from 17 per cent, the lowest rate in the G7.
“What the government is doing is basically making it more attractive to invest in capital,” Chief Economist with Deloitte Canada Craig Alexander told CTV News. He said these new measures will make it cheaper for Canadian businesses to invest, which if successful, could spur productivity and create more economic growth.
As part of the fiscal update -- titled “Investing in Middle Class Jobs” -- the government is proposing a new strategy for export diversification with the goal of boosting international exports by 50 per cent come 2025. This includes chipping away at interprovincial trade barriers, reviewing Canada’s current regulatory framework, $1.1 billion over the next six years to help promote Canadian businesses internationally; and putting an additional $800 million over the next five years to the strategic innovation fund that was announced in the 2017 budget.
“It’s a preemptive strike, it’s a Trump strike… we need to get ahead of this issue, we don’t want out businesses to lose competitive advantage because of U.S. tax policy, even if the U.S. tax policy is not sustainable,” said former parliamentary budget officer Kevin Page on CTV’s Power Play. Though, he cautioned that there is a limit to how far the deficit spending to spur competitiveness can go.
Reacting to Morneau’s statement in the House of Commons, NDP finance critic Peter Julian took issue with the lack of social policy initiatives as part of the mini-budget, while still making room for “gifts” to Bay Street, saying the new competiveness incentive measures will allow corporations to write-off big purchases like “a corporate jet” or a “plush limousine.”
“For regular Canadians, they see nothing in this mini-budget,” Julian said.
There are no specific new measures for Canada’s currently suffering energy sector who are feeling the impact of a dropping price of oil, though Morneau has said the broader competitiveness measures will also benefit the oil sector.
Responding to the latest economic report card, Conservative finance critic Pierre Poilievre said the federal government said it’s “insane” that there was not more announced for the western oil and gas sector.
Poilievre also condemned the Liberals for not showing any path back to a balanced budget.
“If the government had not blown all of the good fortune that landed on its lap in the early days, they would be able to provide tax relief to businesses and Canadians without borrowing to pay for it,” Poilievre said.
Debt to GDP ratio declining, no path to balance
The debt-to-GDP ratio is shrinking, but not as quickly as once thought. It's currently projected at 30.9 per cent.
The economy is expected to grow by 2.0 per cent in 2018, will stay the same in 2019, and drop below two per cent in 2020, to 1.6 per cent, a year later than the 2018 budget predicted.
“One of the things the government has focused on has been keeping the share of debt in the economy on a declining path. This mini budget keeps the debt-to-GDP ratio on a declining trend but that also limits how much they could actually spend on new initiatives,” Alexander said.
Morneau spoke Wednesday with confidence about the current economic indicators and said he is not prepared to change the current Liberal approach in the name of chipping away at the deficit with federal cuts.
In an interview on CTV’s Power Play, the finance minister said Canada is still in a strong economic situation.
“We’re making these investments so the economy does continue to be strong, that’s exactly the objective... our debt is a function of our economy,” Morneau said.
After the 2019-20 fiscal year, the deficit is projected to drop over the next four years, down to $11.4 billion in 2023-24, with still no budget balance in sight. During the 2015 federal election campaign, Prime Minister Justin Trudeau had pledged to run maximum deficits of $10 billion until 2019, when he promised to balance the books.
The government is still factoring in a $3 billion annual adjustment for risk.
The government is attributing the additional debt to be incurred over the coming years to the cost of dozens of policy actions taken since the 2018 federal budget such as:
- $2.7 billion between 2018-19 and 2023-24 for several environmental and infrastructure initiatives, including: the carbon tax payouts, support for LNG Canada, and $325 million for a “steel and aluminum response plan” between 2018 and 2022.
- $1.8 billion between 2018-19 and 2023-24 for labour, health, and safety measures, including: $298 million to make federal space more accessible for people with disabilities; $88 million to extend and respond to the MMIWG nation inquiry; and $133 million for the immigration levels plan; and
- $438 million for international relations and security measures, including: $514 million for renewing Operation Reassurance; and a combined $66 million for enforcing Canada’s trade policy when it comes to steel and aluminum, and maintaining the retaliatory tariffs on the U.S.
Also of note, the fall fiscal update states that as of Nov. 1, Canada has collected $597 million from the countermeasures placed on American steel, aluminum, and other goods on July 1.
The government has factored in the acquisition of the Trans Mountain pipeline from Kinder Morgan, but “given uncertainty surrounding the timing of the construction and the eventual sale” of the pipeline and expansion, the government is not yet adjusting for the cost of construction, the revenue from the existing operational assets, or the revenue from selling it off.
The fall update also includes new measures for Canada’s journalism sector, including setting aside $595 million over the next five years for a temporary 15 per cent tax credit for people who subscribe to eligible digital news media, and creating a new refundable tax credit for both non-profit and for-profit news organizations. Though, the details of these new initiatives will not be released until the next federal budget.