Economic Action Plan 2013, delivered today by Finance Minister Jim Flaherty, reinforces the government’s determination to eliminate the federal deficit by 2015. At the heart of this year’s budget is the government’s vision for maximizing job creation and economic growth within existing or slightly decreased spending levels.

Conservative Prime Minister Stephen Harper is confident both in the Canadian economy and in his party’s political standing. The Prime Minister has made much of his brand about being a good steward for the economy. As much as the government wants to eliminate the deficit, employment levels and the general state of the economy are additional identified budget priorities.

The federal government has used this budget to try to get greater return on investment with respect to current levels of spending. There are three clear areas of focus in the budget on maximizing the value of federal dollars:

Skills: Trying to do a better job of matching the skills Canadians are learning to labour market demand, in particular responding to the growing needs of the natural resource sector with respect to skilled trades like welding and knowledge of the STEM disciplines (Science, Technology, Engineering and Math). Measures include:

  • Creation of the Canada Job Grant could provide $15,000 or more per person. Up to $5,000 will be provided by the federal government, and that amount will be matched by the province/territory and the employer.
  • Reallocate $19 million over two years to give young Canadians access to information about fields of study in high demand areas such as science, technology, engineering, mathematics and the skilled trades.
  • Enhancing skills training opportunities for Canadians with disabilities through a new generation of Labour Market Agreements for Persons with Disabilities that will be introduced by 2014.
  • To create a new “Expression of Interest” immigration management system that will allow employers, provinces and territories to select skilled immigrants from a designated pool.

Manufacturing:  Building  off  of  Economic  Action  Plan  2012’s  work  to  improve  Canada’s performance in innovation, the budget has significantly realigned the supports available to hi- tech and high value added manufacturing. The government clearly believes many of the old manufacturing jobs of the past have already permanently moved to China, but opportunity lies ahead for companies doing high skilled and innovative work.  Measures include:

  • A two-year extension of the temporary accelerated capital cost allowance for new investment in machinery and equipment in the manufacturing and processing sector.
  • Renewal  of  the  Federal  Economic  Development  Agency  for  Southern  Ontario (FedDev Ontario) with funding of $920 million over five years including $200 million over five years for a new Advanced Manufacturing Fund in Ontario.
  • Beyond the Border and the Regulatory Cooperation Council Action Plans continue to move forward.

Infrastructure: The federal government’s continuation of infrastructure spending through a new Build Canada program has a very strategic and focused economic goal, getting people to their place of work and getting goods to market. Investments include:

  • Over  $32  billion  to  municipalities  for  projects  such  as  roads,  public  transit, recreational facilities, and other community infrastructure through the Community Improvement Fund. This consists of the Gas Tax Fund and the GST Rebate for Municipalities.
  • $14  billion  to  support  major  economic  projects  of  national,  regional  and  local significance across the country.
  • The renewed P3 Canada Fund will provide $1.25 billion to continue to support infrastructure projects through public-private partnerships.

The budget reaffirmed the Harper government’s commitment to increased access to new and emerging markets as detailed in its Global Commerce Strategy. All of the main themes contained in the budget – skills, manufacturing and infrastructure – are perfectly aligned with the government’s stated goal of concluding bilateral free trade agreements with the European Union, Korea, Japan and India as well as multilateral agreements including the Trans Pacific Partnership.

More specifically, enhanced skills training in the areas of value added manufacturing will ensure the creation and production of new products for export markets. The shipment of these goods will be further facilitated by the announced investments in strategic infrastructure at bridges, sea ports and airports. Taken together, the signature initiatives outlined in the budget are designed to collectively support and advance the government’s trade agenda.

Targeted Spending Reductions

As well as announcements of new or reallocated spending in the areas mentioned above, a number of federal departments will see their funding frozen or reduced in this budget as the government continues towards eliminating the deficit. Most notably, the Department of National Defence has seen  its  budget  reduced.  While  symbolically  the  military  still  occupies  a  key  place  in  the Conservative agenda, the Prime Minister has made little secret that he believes the military has been well funded in recent years   and now needs to do more to show it is spending that money wisely.

The government also eliminated a number of corporate tax loop holes or tax credits that it either saw as unfair or ineffective. This too illustrates both the tight fiscal circumstance the government is in and the government’s ongoing agenda to slowly eliminate what it sees as inefficiency or lack of focus in the use of public funds.

Procurement Issues

Budget 2013 follows on both the Jenkins and the Emerson reports, which were commissioned to restructure   and  leverage   defence   procurement  investments   in  Canada.   It   announces   the development of key industrial capabilities to guide procurement, a commitment to the National Shipbuilding Industry and increased investments into the Strategic Aerospace and Defence Initiative.

Budget  2013’s  endorsement  of  KICs  should  contribute  to  a  home-grown  specialized  defence industry and may result in increased IRBs for Canadian firms. Furthermore, investments into the SADI  and  the  launching  of  the  National  Aerospace  Research  and  Technology  Network  will encourage technological development by Canadian innovators in aerospace and will provide opportunities for investors to off-set IRB requirements with Canadian R&D firms.

Natural Resources

The Budget will phase out the accelerated capital cost allowance for capital assets used in new mines and will also reduce the rate at which pre-production mine development expenses may be deducted for tax purposes.

There is an extension of the 15% Mineral Exploration Tax Credit for flow-through share investors for one more year.

Creating a New Department and Consumer Benefits

Further, this budget continued with two elements that have now almost become staples of every federal budget: 1) a surprise that people were not told was coming and 2) an easily communicable measure   that   helps   families   in   their   pocket   books.   The   surprise   was   the   government’s announcement that it plans to merge the Canadian International Development Agency with the Department of Foreign Affairs; though with hindsight this does seem a logical continuation of the government’s transformation of the delivery of international aid. The family friendly measure was the elimination of import tariffs on hockey equipment and baby clothing; the notion of making these items less expensive should play well with the Conservative, middle-class suburban family base.

By the Numbers

A total of less than $1 billion dollars in new spending was announced in the budget and in fact total federal government program spending is projected to slightly decrease. The budget has the 2012-13 deficit projected at $26 billion dollars with the deficit falling to $18 billion for 2013-14. A return to balanced budgets is projected for 2014-2015. The 2013-2014 deficit is $8.5 billion higher than was

projected a year ago; this means the Canadian economy will need significant growth to return to reach zero deficit.

The overall spending numbers showed that the Conservative federal government continues to see a limited and, as a percentage of GDP, shrinking role for itself. Funding was again reduced for lower priority departments and programs and only modest, targeted investments were made in those areas that the government sees as key to economic performance.

Details on Other Key Budget Announces

  • $1 billion over five years for the Strategic Aerospace and Defence Initiative, the creation of an Aerospace Technology Development Program, with funding of $110 million over four years starting in 2014–15 and $55 million annually thereafter, and consultations on establishing a National Aerospace Research and Technology Network.
  • Expands and extends for one year the temporary Hiring Credit for Small Business.
  • $10 million to Indspire in support of Aboriginal postsecondary education.
  • Raising the Lifetime Capital Gains Exemption to $800,000 and indexing the new limit to inflation.
  • $92 million over two years to the forestry sector in support of its transformation to higher-value activities and its expansion into new export markets.
  • $225  million  to  support  advanced  research  infrastructure  and  the  Canada  Foundation  for
  • Innovation’s long-term operations.
  • Phases out the Labour Sponsored Venture Capital Corporations Tax Credit
  • $165 million in multi-year support for genomics research through Genome Canada.
  • The development of a comprehensive financial consumer code for the financial sector to replace the current mix of legislation and regulations.
  • Renew the Investment in Affordable Housing, with $253 million per year over five years.
  • A new, temporary First-Time Donor’s Super Credit for first time claimants of the Charitable Donations Tax Credit.
  • $60 million over five years to help outstanding and high-potential incubator and accelerator organizations expand their services to entrepreneurs so that new companies can start and thrive.

Opposition Reaction

Both the NDP and the Liberals have announced their opposition to the budget, declaring it does not do enough to address a number of Canadians’ key concerns. Prior to the budget, both parties sent open letters to Finance Minister Flaherty detailing issues they wanted addressed in the budget. The NDP asked for a reversal of changes to Employment Insurance, increased funding for research and specific actions to improve the social and economic situation for Aboriginal Canadians. The Liberals

asked for action on unemployment, wealth inequality, First Nations education and tourism. The opposition parties are united in their belief that additional details not fully developed in the budget will find their way into the expected omnibus Budget Implementation Bills.

Looking Ahead

In the coming weeks, Parliament will debate and then pass the 2013 federal budget, but this is more a symbolic act as opposed to meaningful action. The pieces of legislation that will give the budget its true power are the main estimates, which approve federal expenditures and are already working their way through parliament, and the budget implementation bill. The implementation bill will be tabled and it is through this legislation that those policy changes announced in the budget that require legislative changes will occur. In recent years, we have seen the federal government include a wide variety of legislative changes in these implementation bills, often to policy matters that were only vaguely referred to in the budget. These bills should be monitored closely as the changes in them can significantly affect your organization.

It is widely anticipated that after Parliament wraps up for the summer, Prime Minister Harper will shuffle his cabinet as he prepares for the 2015 election. Though the Prime Minister likes to keep changes to a minimum, he both has a number of key cabinet ministers who should move to different portfolios for reasons of political management and a number of rising stars who will be looking for a promotion to cabinet. This budget and its implementation may represent the end of a wider systemic and policy-focused phase for the government as it begins to transition to the more purely political focus needed to ensure electoral success.