Forged from continual crisis, the first budget of Trudeau’s third mandate hopes to chart a path from economic recovery to growth.

It seems much longer ago but it was only last year, on September 21st, that Prime Minister Trudeau, in his re-election victory speech, stated that Canadians had given his second Liberal minority government a “clear mandate” to govern and fulfill the Liberals’ platform commitments for Canadians.

This included everything from ambitious carbon emissions targets (that would be made even more ambitious as they aligned with the COP26 agreement in Glasgow that fall) to bold commitments to address front line healthcare challenges, housing affordability – virtually every crack for economic recovery that could soon become a serious fault line.  After a bitterly fought campaign that returned a parliament almost identical to the one adjourned from the House of Commons in June, such confidence struck a dissonant tone for many – including those who voted in a Liberal majority government back in 2015. What followed was a December economic and fiscal update that outlined the government’s plan to “finish the fight against COVID 19, ensure a strong economic recovery and make life more affordable for Canadians.” These were the compass points that would set the direction for Budget 2022.

And then came the Omicron variant, which darkened the mood and many Main Streets across the country once again. This was soon followed by a surge in civil unrest that reached its wobbly, fever pitch with the Convoy occupation of downtown Ottawa and related protests across the country.

All of this, surprisingly enough, led to a change in Conservative leadership with Erin O’Toole’s untimely exit, but this hardly meant the Liberals’ legislative agenda was going to run green lights for the next few months. If anything, an emboldened Conservative caucus, leaning further to the fiscally conservative, was not – and is not – likely to give expansive funding commitments a light review.

And yet, over the last few months there was still more to hobble a finance minister: another looming occupation that seemed far less plausible in February, halfway across the world in Ukraine, all of a sudden became vividly and horribly real as Canada and its NATO partners were tragically reminded of what Vladimir Putin’s criminal actions in Chechnya, Syria, and Crimea should have told them: when someone shows you who they are, believe them. And then reconsider your defense budgets accordingly.

Throughout all this tumult, in the periphery, have remained the dark shadows cast on Canada’s economic outlook from three looming threats, serial climate change crises, coarsening trade relations with key partners including the US and China, and supply chain snarls that show no signs of abating – for years. It came as no surprise to anyone closely following all this that, just a month ago, the Bank of Canada raised its policy interest rate to 0.5 percent from 0.25 percent – its first hike since 2018. With a risk of stagnant economic growth and flattening arcs for wage increases meeting rising inflation, a “rapid monetary policy tightening cycle” is all but expected.

All of this is context for the formidable challenge handed to Trudeau and his Finance Minister Chrystia Freeland over the last few months: how do you craft some kind of narrative that begins in economic recovery and leads us back to growth again? And more crucially, how do you win the support of the House so these measures will not be endlessly debated and dragged through the House of Commons for weeks, maybe months? It’s fair to say no government has had to face these headwinds in peacetime since the Depression.

One answer was: a Confidence and Supply Agreement with the NDP, anyone? A rough outline of shared commitments, many of which were given an airing in Liberal policy conventions and platforms, has suddenly given this Liberal government the latitude for longer term thinking. You might think, all things considered, they’ll probably need it.

The second, following just a little over two weeks later, is the Budget tabled today. Its main themes were signalled earlier this week and in many respects were substantiated, as we have detailed below: big ticket spending on a range of programs to address climate change, a boost to defense spending by $8 billion dollars over five years, a commitment to accelerate adoption of electric vehicles, to provide much needed tax relief and support for small businesses, to create levers to tackle the housing crisis and lean in, finally to the Liberals’ stated commitments to healthcare – including this new commitment for dental care, courtesy of the new agreement with the NDP. It is a policy document forged in crisis, with a predictable deficit number and, perhaps less predictably, given that overweening confidence of last September, a humbler understanding of the formidable challenges ahead.

Spending Summaries

In total, Budget 2022 commits over $55 billion in new spending across three key pillars—people, the green transition, and innovation and productivity. Including and in addition to these key pillars, some of the key sector commitments are as follows:

A Stronger Health Care System

  • Budget 2022 includes several measures aimed at building resilience in our healthcare system. These included the previously announced $2 billion to the provinces to help clear surgical backlogs and more than $1.5 billion in surveillance and risk assessment measures to ward off the next pandemic. It also includes investments to help bring in new talent to our ravaged healthcare sector, including loan forgiveness and money for foreign credential recognition.
  • As part of the governing agreement with the NDP, the Liberals have also committed over $5 billion to implement a national dental care program for lower income earning families. This will start with under 12-year-olds in 2022, and then expand to under 18-year-olds, seniors, and persons living with a disability in 2023, with full implementation by 2025.
  • Also part of the governing agreement, and hearkening back to previous budgets, this one makes commitments related to national pharmacare. Specifically, Budget 2022 commits to tabling legislation and working to have it passed by the end of 2023. It will then task the Canadian Drug Agency to develop a national formulary of essential medicines and bulk purchasing plan.
  • There is further funding to help those living with mental health and substance abuse challenges, brain health, and in keeping with this government’s stance on gender equity issues, Budget 2022 includes commitments to a fund that will help make menstrual products and tax credits for surrogacy and fertility treatments available to those who need it.
  • Budget 2022 also contains a sizeable commitment to increase the Canada Health Transfer by nearly five per cent from the previous fiscal year to a total of over $45 billion in support. The increase however does come with the strings attached: expenditures must be dedicated delivering better health care outcomes. To that effect, the budget includes measures to shore up the health data that underpins Canada’s health care system. Expect ongoing tensions between FPT governments as the details of national pharmacare and federal health transfer increases are hammered out in the coming months.

Reinforcing Canada’s Defence Capabilities and Priorities

  • Since Putin has invaded Ukraine, our NATO allies have put pressure on Canada to increase its defence spending to meet the 2 per cent of GDP commitment all have verbally committed to and supported. In response, Budget 2022 proposes $6.1 billion over five years, beginning this year, to meet current defence priorities such as: continental defences, commitments to our allies, and for investments in equipment and technology to immediately increase the capabilities of the Canadian Armed Forces.
  • Furthermore, Budget 2022 proposes to provide an additional $500 million this year to provide military aid to Ukraine and almost $1 billion to the Communications Security Establishment over the next five years to address evolving cyber threats. The $8 billion in new defence spending will see Canada fall short of the 2 per cent NATO commitment, reaching only 1.5 per cent.
  • Budget 2022 acknowledges that to increase spending substantially, the government must first determine where funding is needed, and for what. To that end, the government has committed to completing a defence policy review in efforts to update its existing defence policy, Strong, Secure, Engaged, in support of its broader international priorities and the changed global environment.

Investing in the Green Economy

  • Investing in the transition to a green economy was one of the three central pillars in this year’s budget. Late last month, the Liberals released their Emissions Reductions Plan (ERP), which allocated $9 billion in new funding to help Canada meet its Paris Accord targets by 2030 and net-zero commitments by 2050.
  • Budget 2022 layered new funding and additional details onto the initial commitments made in the ERP. Perhaps most significant are the down payments that the federal government is committing to by creating the necessary incentives and infrastructure to support the wide adoption of electric vehicles, both for individuals and businesses. This includes over $500 million to incent the purchase of medium and heavy-duty electric vehicles. The federal government is further making large investments to establish the infrastructure to support the domestic manufacturing of electric vehicle batteries and the necessary supply and distribution chains.
  • There is also $15 billion allocated to establish the Canada Growth Fund to attract substantial private sector investment to help meet important national economic policy goals such as our climate targets. The Canada Infrastructure Bank will have an expanded role to invest in private sector-led infrastructure projects that will accelerate Canada’s transition to a low-carbon economy. New money is also invested to support renewable electricity, grid modernization, and research in minimizing the waste generated by small modular reactors.

Making Housing More Affordable

  • As the government’s polling undoubtedly affirmed time and again over the last two years, the most significant affordability issue for Canadians is housing and this budget seeks to address affordability with a $10 billion investment focused on housing supply and first-time home buyers. Specific measures include a two-year ban on foreign buyers, $4 billion to help construct 100,000 new homes through a Housing Accelerator Fund administered by CMHC, $1.5 billion for affordable housing through a now extended Rapid Housing Initiative, another $1.5 billion towards co-op housing, and the creation of a tax-free savings account that will allow Canadians to save up to $40,000 for their home purchase.

Strengthening Supply Chains

  • Supply chain interruptions were never on the radar of ordinary Canadians prior to the pandemic, and now we all understand the havoc they’re causing and their impact to inflation. To address this, the federal government is investing $450 million in the National Trade Corridors Fund to ease the movement of goods across Canada’s transportation networks, investing in industry-driven data solutions to drive supply chain efficiencies, and by cutting red tape in the transportation regulatory environment.

Corporate Measures

  • The government is contending with several issues related to innovation, namely investment and the creation and retention of intellectual property. To that end, it has announced it will create an independent innovation and investment agency and build out its approach to intellectual property as their review of the existing regime continues. The government’s previous whiz-bang innovation idea – the superclusters – was granted a renewed funding envelope but each will now have to compete with the other for this additional support.
  • On corporate tax measures, the government has proposed a host of anti-tax avoidance measures that are aimed at high net-worth individuals and corporations. These measures close existing loopholes and help raise money for a government hoping to close the gap between spending and revenue.
  • Budget 2022 also moves ahead with the introduction of a 15 per cent tax on profits on the taxable income of banks and insurance companies, above $1 billion – a move that is expected to put approximately $4 billion back into the government’s coffers.

What It All Means

In a budget that has been closely watched to see if the governing Liberals deliver on their promises –  to Canadians and to their new supply and confidence agreement partners in the NDP – we finally see some measure of a minority parliament that is finding stable footing.  As the budget is debated in the House, it will survive the first test of the new supply and confidence agreement, and in the words of the NDP leader, “provide important things that will change the lives of Canadians.”

Regarding the crucial affordability narrative, both the Liberals and the NDP can come out of the House today and say they have worked together to implement measures that will have a long-term impact on the quality of life for working Canadian families in tangible ways, by addressing the larger themes they have both outlined since the last election campaign.

And yet, the argument the Conservatives are crafting and sharpening with their messaging is clear, focused and could become increasingly compelling: that little regard has been paid to the foundations of strong fiscal policy, and that the prospect of “stag-flation” is real. Increasingly so. You could say it might be predictable, but the crowds who are coming to Pierre Poilievre’s campaign events, by the hundreds, would clearly like a little more predictability in their lives, and his messaging is starting to look as effective and as galvanising as Trudeau’s almost ten years ago.

With interest rates rising to tame the effects of inflation, the government’s ability to spend is not infinite. It will be important, for the Liberals’ fortunes, to underscore this budget’s efforts to greater fiscal prudence, such as the allocation of $31.2B in net new spending over the next five years.

To afford all the new spending committed, while staying anchored to a declining Debt to GDP ratio, the inflationary shock has driven up overall revenues. This is some consolation for the short term, as it has driven up commodity prices, enabling the government to present a better balance sheet. Give this budget a B, for now, for economic stability, when you factor in support in the House for two or more budget cycles – and a hoped-for return to serious talk of the fiscal anchor.
Yet as the Conservatives have noted, if inflation is not rigorously addressed for the long term, we could see a worrying trend in declining future economic growth, and the medium-term growth prospects need to be thoroughly examined in the rapidly shifting economic landscape.

What’s to Come

With many commitments still waiting to be painted in fine detail or legislated, there is much left to be done between now and when parliament breaks for the summer in less than three months. There is sure to also be spillover to the fall session and additional costing to come in the next economic and fiscal update.

How the government makes life more affordable and grows the economy while making good on its commitments, both domestic and international, will be the greatest threat and challenge…for everyone. Yet hope is not only the oxygen of election campaigns, it also brightens an economic outlook and creates incentives for those big ticket investments that ultimately drive an economy – like housing, new (electric) vehicles, and notably, education, up-skilling and innovation.
As one journalist commented to staff in the Prime Minister’s office, as they transitioned from briefings on Ukraine to emissions reductions, “even your smaller issues are crises right now.” Buffeted by wave after wave of major developments since 2019, the affordability measures in this budget risk barely registering for Canadians in the short term if there is not at least some cessation from events that can seem both tragic, infuriating and out of their control.

Confidence in the future requires an increasingly complex set of variables, as Canadians have come to know only too well over two plus years of a pandemic. Confident economies, especially ones that might return to a fiscal anchor, post-pandemic, require some stability that isn’t solely measured in election cycles. The Liberals can argue that they remain attentive to the larger indicators of economic stability with this budget – job numbers are up and there are positive signs of growth. They can also argue they remain grounded, along with their NDP colleagues with this confidence and supply agreement, in the challenges working families continue to struggle through.

But it is not their confidence that will ensure the economy will get back on track. Investor confidence must return as well.

 

Authored by members of H+K’s Public Affairs + Advocacy team including Andy Singh, John Delacourt, Melissa Pasi, Kimberley Hanson, Michael Plastino, Daniel Komesch, Eric Dillane, Laura Grosman, Aisling MacKnight, Amelie Gadient, Ana Krstanovic, Ikram Farah and Jason Evans.