Overview

In a short budget speech, Finance Minister Jim Flaherty did not deviate from the Conservative government’s focus on prudent economic management. The minister delivered on the commitment to deliver a balanced budget, with a $2.9-billion projected deficit for 2014-15 and a projected surplus of $6.4 billion for 2015-16.  Major new expenditures were funded through re-purposed monies such as those originally allocated for defence procurement. There was cautionary language over the fragility of the global economic environment and of restraining from adding tax burden. In essence, the Minister of Finance delivered balance – a key campaign promise from 2011.

This was Minister Flaherty’s tenth budget and, according to commentators, he struck the right chord for financial markets by reiterating the government’s commitment to restoring a federal budget surplus in fiscal 2015. The government has now put the call to action out to the private sector to create employment, as the government believes it has set the framework by shrinking government and balancing the books. It now believes economic growth should come from private-sector investment.

Although this budget did not contain the details of the roadmap going into the 2015 election, it was aimed at target voters who could make the difference to the Conservatives’ re-election in 2015, particularly swing voters who have been “test driving” Liberal leader Justin Trudeau.  Both the NDP and Liberals have made advances in the last year offering a different style of leadership and less austere approach to government spending.  This budget is about laying the foundation for the next budget in the election year and reinforcing the ‘competent economic manager’ profile the Harper government worked years to establish. We expect Prime Minister Stephen Harper to be front and centre in many of the follow-up announcements, including those relating to infrastructure announcements in the days to come. The prime minister’s strategic approach can be seen throughout the budget documents including the focus on Consumers First, selling government assets, support for university research and community-based infrastructure spending.

The government wanted this budget to speak to the Conservative base and the ‘soft middle’ in order to build a broader coalition of support in this all-important pre-election year. By presenting it early in the winter during the Sochi Olympics where Canadians are captivated by an early medal run, the  Opposition may have difficulty keeping their focus on the budget.

Going forward, we expect to see more definition to the Conservative political agenda around broadening Canada’s global export market through: further trade missions led by the Prime Minister to Mexico, Europe and Asia; infrastructure investments in areas in need of economic attention; and a youth employment focus.

For Minister Flaherty, whom some have predicted may retire before the next economic update, today’s budget will let him claim his personal goal of a balanced budget. This budget allows the government to pivot to the election agenda and possibly put in place a strong communicator and performer to replace Minister Flaherty if he should choose to retire. Potential contenders to replace him include Jason Kenney, John Baird or James Moore.

Moving from austerity to focused spending will set the stage for the 2015 election.

Agriculture & Food

Following the government’s promise to unveil a consumer-focused budget, it announced $390 million over five years to strengthen Canada’s food safety system, something that has been top of mind for Canadians in recent years. Measures will include the establishment of a national Food Safety Information Network, the continuation of BSE programming and, most importantly, the enhancement of the Canadian Food Inspection Agency’s food safety programs that target high-risk foods. Funding will support the hiring of over 200 new inspectors and other staff while developing targeted programs as needed.

The budget also re-announced the launching of a pilot Price Insurance Program for Western Livestock Producers.

These measures reinforce the government’s consumer-friendly agenda and seek to respond to the public’s consistent focus on healthy, safe foods. They also recognize the importance of agricultural exports to the Canadian economy and underscore the government’s continued support for free trade through the negotiation and implementation of trade agreements with key nations and regions.

Consumer Issues

The emphasis on consumer-friendly issues in this budget, coming little more than a year before the next federal election, is intended to capture the attention of voters and reinforce the Conservative government’s efforts to brand itself as the party “looking out for everyday Canadians” (Speech from the Throne, October 16, 2013) and helping to make life affordable for Canadians. But with shrinking revenues and a longstanding commitment to balance the budget, the government had few resources to spend on consumer issues so focused heavily instead on measures to regulate lower costs from industry or reviewing existing consumer programs.

Among its list of measures, the government signaled that it will introduce legislation to cap wholesale domestic wireless roaming rates; spend $305 million over five years to extend and enhance broadband internet service for Canadians in rural and Northern communities; eliminate the practice of “pay-to-pay” billing; develop a comprehensive financial consumer code;  ensure access to basic banking services; improve fairness and transparency in the credit card market; raise public awareness about the costs of and alternatives to payday lending and other high interest rate lending products, collateral charge mortgages, and bank powers of attorney and joint accounts; and amend legislation to allow Canadians to take beer and spirits, in addition to wine, across provincial boundaries for personal use.

Absent from the budget was any mention of the ‘unbundling of cable channel options’ that was referred to in the Speech from the Throne.

Today’s much anticipated initiative on country pricing is the second policy announcement in as many years (last year’s budget lowered tariffs on sports equipment and baby clothing as part of a pilot project to determine if the price savings would reach consumers) aimed at addressing the price gap between consumer goods sold in Canada and in the United States. If effective, it will appeal both to consumers and to many retailers in Canada who feel they are losing business across the border. What remains unclear, however, are the mechanism and standards by which this legislation will be carried out by the Competition Bureau.

Defence & Procurement

Support for Canada’s military and national defence has been a central theme for the Conservatives since their first mandate in 2006, but with the winding down of Canada’s military presence in Afghanistan and targeted spending reductions hitting defence and procurement, the government’s focus on this sector has been declining recently, even as it tries to deliver major procurement programs.

In its 2014 Federal Budget, the government is delaying defence spending in order to continue its plan of low federal spending. Faced with ongoing difficulties in purchasing defence equipment and a general lack of transparency and accountability on major procurement projects, the government had already announced last week a new strategy for defence procurement, introducing a “super secretariat” to be overseen by deputy ministers from Public Works, National Defence, Industry Canada and Treasury Board to ensure “fairness monitors” and audits in hopes of keeping everything on track and transparent. The government officially introduced the Defence Procurement Strategy in today’s budget to ensure equipment will be delivered on time and decision making will be streamlined. This new approach to defence procurement is expected to help create jobs, build industrial capacity, encourage innovation, promote export opportunities and drive economic growth in Canada.

The government signaled a significant shift in the Industrial and Regional Benefits Policy for procurement projects, along with a focus on some specific procurements (the Marginal Terrain Vehicle and Headquarter Shelter System projects for National Defence, and Medium Life Helicopters for the Coast Guard). Within the budget, the government announced $3.1 billion in National Defence funding for major capital procurements for 2013 to 2017.

In advance of the release of this Budget, many questioned the investment the government would make for veterans following several difficult weeks of public relations challenges. Today’s budget announces $2.1 million to improve online access to veteran’s services and $108.2 million to assist in proper funerals and burials. In addition, the government has focused on aging veterans’ health by improving services such as psychological treatments, home care and long-term care support, as well as vocational rehabilitation and training programs to assist veterans in finding employment.

Canada’s North remains a major area of focus for the Conservative government as they continue to invest in northern sovereignty through economic development, infrastructure, and the overall health of its communities and families. The government is investing $70 million to increase health services, as well as further funding for the Nutrition North Canada program that assists families accessing healthier food choices.  Other investments were made in terms of infrastructure with a focus on transportation, Internet and broadband improvements, airport improvements and community harbour construction. Internet and broadband investment comes from a December 2013 CRTC decision to improve telecommunications in Northern Canada, effectively opening a procurement for broadband or satellite services.

Education and Skills Training

With negotiations still ongoing with the provinces on the implementation of the Canada Jobs Grant and New Labour Market Development Agreements, the government made announcements that maintain the familiar themes on giving young people opportunities to learn skilled trades and improving outcomes for Aboriginal Canadians and Canadians with Disabilities.

Specific measures include reviewing the $330-million annual Youth Employment Strategy to better align it with the evolving realities of the job market; reallocating $15 million annually from the Youth Employment Strategy towards supporting up to 1,000 internships in small and medium-sized enterprises; expansion of the Canada Student Loans program to help registered apprentices in Red Seal Trades pay for the cost of their training; $40 million over two years to support 3,000 internships in high demand fields; confirmation of the previously announced $222 million annually over the next four years, to be matched by the provinces and territories, for a new generation of Labour Market Agreements for Persons with Disabilities; $1.25 billion of core funding from 2016-17 to 2018-19 in support of the First Nations Control of First Nations Education Act; and a new Enhanced Education Fund that will provide funding of $160 million over four years, starting in 2015-16, to support new First Nations Education Partnerships.

While many of the investments in this policy area were either incremental increases or reprofiling of existing funds, The First National Control of First Nations Education Act represents a major policy victory for both Aboriginal Affairs Minister Bernard Valcourt and Assembly of First Nations Chief Shawn Atleo. The goal of this act is to bring the quality and results of First Nations-run schools up to those of their provincial counterparts, and the new investments in this area were clearly a necessary element to get all parties to agree to this package of reforms.

Employment

The government`s actions in this budget on creating jobs and economic growth are a direct response to a number of goals laid out in last October’s Throne Speech, including reforming the Temporary Foreign Worker Program and continuing to create the conditions for new and better jobs for Canadians across all sectors of the economy.

While some were expecting the federal government to renew the hiring credit for small businesses that is set to expire this year, it instead focused its employment efforts on other familiar challenges: older workers, maintaining automotive manufacturing jobs, reforming the Temporary Foreign Worker Program and matching immigration to the labour market.

An additional $500 million will be provided over two years to the Automotive Innovation Fund, which provides repayable contributions to automotive firms that are undertaking strategic, large-scale research and development projects focused on new vehicle technologies.

$75 million will be invested over three years to assist unemployed older workers find jobs through programs such as the Third Quarter Program.

The federal government will launch a Job Matching Service that will provide job seekers with tools to find jobs that match their skills, and provide employers with better tools to look for qualified Canadians. $11.8 million will be invested in the first two years to create this program then $3.3 million in ongoing funding to support it.

The Labour Market Opinion process for temporary foreign workers will be strengthened by realigning the application streams to better identify vulnerable temporary foreign workers and improve processing times for certain applications; limiting the use of the program in high-unemployment regions; and ensuring that employers transition to a Canadian workforce through better detection of employer non-compliance.

The government will also focus on immigration streams that better align with the labour market by cancelling and refunding applications from the Immigrant Investor Program and the Entrepreneur Program streams.

Energy

Today’s budget continued the government’s emphasis on major energy development projects, particularly pipeline projects that will provide access for Canadian oil and gas to export markets.

Funding of $28 million over two years was announced to allow the National Energy Board to review project applications, including TransCanada Pipelines Limited’s Energy East Pipeline Project, within legislated timelines and to enhance the Participant Funding Program. Industry will be expected to absorb the cost of this new funding through cost recovery.

The budget committed the government to responding to the Fall 2013 reports of the Tanker Safety Expert Panel and the Special Representative on West Coast Energy Infrastructure (Douglas Eyford), although it did not provide specifics or make funding commitments.

The budget eliminates tariffs on offshore drilling platforms, lowering the cost of business by about $13 million.

The budget provides modest support for Canada’s nuclear industry by providing $117 million over two years to Atomic Energy of Canada Limited’s Chalk River Laboratories as it prepares to transition to government-owned, contractor-operator status.

The budget provides modest (around $1 million per year) tax breaks to clean energy generation by extending the accelerated cost capital allowance (CCA) rate to water current electricity generation equipment, used in “run of the river” hydroelectric projects, and to a wider range of equipment used in waste gasification.

Energy industries will be pleased with the budget’s renewed emphasis on labour market development and skills training, as lack of skilled labour is one the major cost drivers for energy development projects. Progress towards the implementation of the Canada Jobs Grant, which will now launch on April 1, 2014 in all jurisdictions – even where agreements have not been reached with provincial governments – and the new Canada Apprentice Loans program will be seen as welcome steps towards expanding the pool of skilled labour.

Financial

The budget moved aggressively on financial consumer agenda issues and spoke to changes to come in both the regulatory landscape and to detailed consumer issues that will affect every Canadian.  It reinforced the government’s commitment to developing a pro-consumer framework that ensures Canadians fully understand the costs and benefits of a  range of financial services products. The budget sets up comprehensive policy reviews in key regulatory bodies such as CDIC and the Canadian Payments Association, and with regard to key Acts such as that governing anti-money laundering, anti-terrorist financing and the Payment Clearing and Settlement Act.

The government signaled its continued commitment to a national securities regulator and spoke to continuing to work to see the establishment of a “Cooperative Capital Markets Regulator.”

The government did not announce a cap on ATM fees as the Official Opposition had wanted. However, the list of changes to key sectors and the consumer friendly “face” of the changes has given the Conservatives the edge in terms of continuing to enhance a financial issues agenda for average Canadians.

New issues highlighted included the promise of the introduction of legislations and regulations to establish a P&C demutualization framework, and the commitment to work with stakeholders on interchange fees. The government formally recognized the 2013 Competition Bureau finding that certain of Visa and Mastercard’s network rules have had an adverse effect on competition.

Health

The budget emphasized the Conservative government’s ongoing commitment to health innovation, lowering taxes, and protecting consumers to help define its particular role in improving patient care and outcomes while sustaining costs.  Notable initiatives include $15 million per year to the Canadian Institutes of Health Research, for the expansion of the Strategy for Patient-Oriented Research, the creation of the Canadian Consortium on Neurodegeneration in Aging and other health research priorities; $44.9 million over five years to expand the focus of the National Anti-Drug Strategy for illicit drugs to also address prescription drug abuse in Canada; and the addition of the professional services of acupuncturists and naturopathic doctors to the list of health-care practitioners whose professional services provided to individuals are exempt from the GST/HST.

The federal government has remained steadfast in its strict respect for provincial and territorial jurisdiction over the delivery of health care in Canada, but the fact that spending on health care has outpaced economic growth continues to cause concern at the federal level. There have already been policy changes that scale back spending to create better alignment with economic growth – most notably demonstrated in Finance Canada’s decision on the future of the Canada Health Transfer.  Now the government is again looking at specific tools to provide the innovation, partnerships, and research to strengthen the infrastructure that will support a sustainable health care system in Canada for decades to come.

Infrastructure and Transportation

The budget reasserts the Government’s 2013 Economic Action Plan commitment to a 10-year, $53-billion Building Canada Plan that will be launched by March 31 to support the construction of public infrastructure assets and indicates that consultations with the Federation of Canadian Municipalities and other stakeholders are ongoing to finalize the parameters of the new program.

Starting in 2014-2015 this plan will provide $21.8 billion over 10 years through the Gas Tax Fund; $10.4  billion over 10 years under the incremental Goods and Services Tax Rebate for Municipalities; $14 billion over 10 years for a new Building Canada Fund to support major economic projects of a national, regional and local significance; $1.25 billion over five years for a renewed P3 fund; and $155 million over 10 years for First Nations on-reserve infrastructure from the new Building Canada Fund, in addition to allocations from the Gas Tax Fund.

$6 billion in direct federal support to provinces, territories and municipalities under current infrastructure programs in 2014-15 and beyond.

The budget also outlines a series of investments in the development and maintenance of specific federal transportation assets or priorities.  Of note are the commitments of $165 million on a cash basis over two years to advance the construction of a new bridge for the St. Lawrence Seaway and an additional $378 million in the same timeframe to advance the repair and maintenance of federal bridges in the Greater Montreal Area, including the Champlain Bridge; the commitment of $58 million over two years to maintain federal ferry services in the Atlantic; the commitment of $40 million over two years for maintenance and repair at small craft harbours and $33 million over two years to continue support for the divestiture of regional ports.

One unexpected announcement was new spending of $200 million over five years for a National Disaster Mitigation Program. The program is set to begin in 2015-2016 and will invest in structural mitigation measures to reduce the impact of severe natural disasters such as floods. Project costs will be shared with provinces and territories. Disaster mitigation projects are also eligible for federal cost-sharing under the new Building Canada plan.

Natural Resources

With job creation and economic growth remaining at the forefront of the Conservative agenda, this budget has quietly reaffirmed the government’s commitment to the mining and energy community as necessary to continued economic recovery and growth in Canada. Much of the heavy lifting on this file was done in previous budgets, however, through measures and legislation supporting the mining and energy sectors, so today’s budget was relatively light on new initiatives.

The budget did announce the government’s intention to introduce amendments to the Hazardous Products Act and other consequential amendments to align and synchronize implementation of common classification and labeling requirements for workplace hazardous chemicals. Other highlights include:  $66.1 million over two years to renew the Atlantic Integrated Commercial Fisheries Initiative and the Pacific Integrated Commercial Fisheries Initiative; $90.4 million over four years to continue to support the Investments in Forest Industry Transformation program; and supporting mineral exploration by junior companies by extending the 15-per-cent Mineral Exploration Tax Credit for flow-through share investors for an additional year.

Science &Technology, Research & Innovation

The higher education research effort received its most significant injection of new funds in several years. Universities will get new support to cover the costs of their research activities with the creation of the Canada First Research Excellence Fund. The administrative details of the fund have not yet been released, but it will provide $1.5 billion in new support over the next decade, starting with $50 million in 2015-16, growing to a steady-state level of $200 million annually in 2018-19 and beyond.

The budget also increased the annual budgets of the three federal research granting councils and built on a number of other previous federal investments, including $222 million over five years, starting in 2015-16, to the TRIUMF physics laboratory to support the research and international partnership activities, and $15 million over three years, to support the Institute for Quantum Computing’s plans to commercialize leading-edge research in quantum technologies.

These measures indicate that science and technology remains a top priority for this government, particularly when it comes to converting investments made in science and technology into commercial products that benefit the Canadian economy and create jobs.  They further elaborate on October’s Speech from the Throne, when the government announced its intention to release an updated Science, Technology, and Innovation Strategy and committed to continue targeted investments in science and innovation, although with consultations on the updated strategy having just ended, any new ideas arising from them will not have been reflected in today’s announcements.

Future initiatives in this sector, including those arising from the just-concluded consultations, are likely to reinforce the government’s emphasis on helping to promote greater commercialization of R&D and supporting world-class discovery-driven research at all levels by building strategic collaborative relationships across all partners.

Telecommunications & Technology

The Conservative government used the budget to claim ‘victory’ relating to wireless competition, choice and price of mobile services. Today’s budget added a note that the government will be moving forward with the wholesale roaming rate cap legislation and will introduce legislation to provide the CRTC with powers to impose penalties if the telecom providers do not adhere to the auction or wireless code provisions.

With the spectrum auction nearing completion, the government will claim financial victory and add this to the deficit projections. Of note, the budget contained a reference to companies that have not used the awarded spectrum losing it. This is consistent with recent comments by Industry Minister James Moore that expanding competition, not lessening it, is at the centre of the policy framework.

The government committed a further $305 million over five years, or $61 million annually, on extending 5 megabits broadband service to 280,000 households to make broadband ‘near’ universal. Further details on the program will be announced in the coming weeks.

The government also signaled the continuation of the consumer-first agenda with a reference to the CRTC proceeding on the “pay to pay” billing procedures.  Most of the telecom procedures were re-statements of already announced initiatives while the government’s focus on the banking and pay day loan sector seemed to be enhanced.

Today’s budget did not identify any new money for the long-awaited Industry Canada sponsored Digital Strategy.

Trade

Four months after the successful negotiation of an agreement-in-principle for a Comprehensive Economic and Trade Agreement (CETA) with the European Union, and three months after the government unveiled its ambitious Global Markets Action Plan, Economic Action Plan 2014 reaffirms the government’s commitment to expanding access to priority markets, diversify Canada’s trade portfolio and attracting foreign investment.

More specifically, with the EU CETA now in the final stages of completion, the government has turned its focus to the Asia-Pacific region where it hopes to conclude bilateral free trade negotiations with Korea, Japan and India as well as a multilateral agreement with the Trans Pacific Partnership in order to increase our access to the world’s fastest growing markets.

With respect to Canada-U.S. trade, Economic Action Plan 2014 confirms the government’s ongoing commitment to both the Beyond the Border Action Plan as well as the Regulatory Cooperation Council Action Plan.  In addition, recognizing the importance of the Windsor-Detroit trade corridor, the government has committed to provide $470 million over two years to support project delivery activities and related procurements to advance the construction of the new bridge crossing.

To ensure the free movement of goods within Canada, Economic Action Plan 2014 commits the government to developing an Internal Trade Barrier Index, modeled on the OECD’s Services Trade Restrictiveness Index, to help identify obstacles which currently restrict internal domestic trade. The government has further committed itself to working with the provinces and territories to revitalize the Agreement on Internal Trade and remove barriers to interprovincial trade for the benefit of Canadians.

Opposition Reaction/Priorities

Opposition Leader Thomas Mulcair told his NDP caucus last month that consumer issues would be the top priority of the party in this session of Parliament, so in the lead up to today’s budget, the NDP had called on the government to usher in specific consumer protection measures, including capping ATM fees, cracking down on payday loan interest rates, and lowering credit card interest rates. While there was no action taken on ATM fees, there was vague reference to ‘improving fairness and transparency in the credit card market’ and ‘raising public awareness on payday lending’. None of these measures were adequate enough to avoid the Official Opposition’s criticism of today’s budget as a “do nothing budget’.

By also highlighting consumer issues in the run up to next year’s federal election, the NDP is seeking to establish a clear contrast between the NDP (“we’re going to stand up for families” – Thomas Mulcair) and the Conservatives (“looking out for everyday Canadians” – Stephen Harper) as to which party is best at protecting Canadians’ pocketbooks.

The NDP also criticized the budget for doing little to address the issue of unemployment, specifically youth unemployment. In their post-budget interviews, the NDP criticized the budget for lacking specific measures to help the 260,000 unemployed young people (ages 15-24) in Canada, despite strong assurances from the Finance Minister that such measures would be there.

Echoing the NDP, the Liberals also said the budget did nothing for young Canadians or their parents, and criticized it for failing “to deliver real economic growth and solutions for the middle class.” They accused the government of balancing the budget “on the backs of Canadian workers” and through defence cuts that will leave Canadian troops without the equipment they need. The Liberals also criticized the government’s plan to implement its job grant program over the objections of the provinces.

Next steps

By tradition, the budget does not receive the endorsement of the Opposition, and this one is not expected to break from this practice. While the vote on the motion to accept the budget statement is currently scheduled for Thursday, the NDP, as Official Opposition, could delay the vote until Monday, February 24, although the Conservatives’ majority in the House of Commons will ensure the motion is passed, whenever the vote takes place.

Once the budget statement has been accepted by the House of Commons, some of the measures in it can be implemented immediately through a Ways and Means motion, but others will require regulatory changes or new legislation to be enacted. The government is expected to introduce its Budget Implementation Bill later this month, with debate and consideration by committee taking place in March/April and adoption of the bill by early May.