The federal Liberals are set to unveil a budget on Tuesday aimed at outlining their plans to keep Canada competitive in the clean energy transition while supporting Canadians struggling to make ends meet.
Finance Minister Chrystia Freeland has pledged to accomplish all of this in recent weeks, while pledging to maintain fiscal restraint.
However, achieving this balance should not be easy. The slowdown in the Canadian economy could weigh on government coffers.
“It will be very difficult for the federal government,” said Randall Bartlett, senior director of the Canadian economy component at Desjardins.
The Liberals are expected to invest heavily in Canada’s clean energy transition, with the goal of keeping Canada competitive with the United States by launching its own aggressive measures.
The Reducing Inflation Act, which was passed by the US Congress in August, invests nearly US$400 billion in several fields of activity to achieve this, from critical minerals to the manufacture of batteries, electric vehicles and clean electricity, including hydrogen.
Ottawa has also promised a lot of money for health care. It recently signed 10-year funding agreements with the provinces on health transfers, and it is expected that these expenditures will be accounted for in the federal budget.
Then, as the cost of living remains an important economic issue for many Canadians, the Liberals indicated that the budget would include new measures on affordability.
“Over the next few weeks, for the Canadians who are feeling the effects of rising prices the most, for our most vulnerable friends and neighbours, our government will provide additional targeted inflation relief,” said the Minister of Finance. , Chrystia Freeland, Monday in Oshawa, Ont.
Bartlett warns, however, that the federal government must balance its major spending priorities with an uncertain economic outlook.
Many economists are predicting that Canada could slip into a recession this year as high interest rates weigh on the economy. Since March 2022, the Bank of Canada has aggressively raised interest rates to combat high inflation.
As global price pressure eases and interest rates dampen spending in the economy, inflation is slowing. The annual inflation rate in Canada fell from 8.1% last summer to 5.2% in February.
Even if inflation becomes less of a problem, the slowdown in the economy means less government revenue to fund spending.
According to a Desjardins report, the new spending measures alone would not necessarily put federal finances on an unsustainable path. However, if significant new spending is coupled with a worse-than-expected economic downturn, it could create challenges for the federal government, the report said.
“Planning for an optimistic future and spending accordingly now could lead to very difficult circumstances in the future,” Bartlett warned.
The federal government also runs the risk of fueling inflation through overspending, which makes it harder for the Bank of Canada to keep inflation in check. Mme Freeland has repeatedly said she has no intention of doing so, pointing out that the federal government cannot compensate all Canadians for the price hike.
Bartlett said the federal government has done a good job so far of balancing the need to help low-income Canadians while not adding fuel to the fire.
“What concerns me is that if they continue to add this to additional spending on other initiatives, it will not only make the Bank of Canada’s job more difficult, but it will only increase the deficit at a time when the economic outlook is very uncertain,” he said.
There is some ambiguity about how the federal government will address tax policy in this year’s budget.
Some policy pundits have suggested that increasing tax revenues could be part of the solution to stabilizing federal finances. A shadow budget prepared for the CD Howe Institute, an economic think tank, recommended raising the GST rate.
Desjardins expert acknowledges raising the Goods and Services Tax (GST) may be difficult to sell to Canadians, especially as the federal government has had mixed results in some of its key areas of investment , such as its national housing strategy.
“If we continue to see increased spending, and that requires tax increases to pay for it, the public will take a closer look at whether we’re getting our money’s worth,” says Randall Bartlett.
Politically, the Liberals must also deal with the New Democrat priorities set out in the confidence agreement between the party and the Liberals. He agreed to support the minority government in key votes through 2025, including on federal budgets, in exchange for action on shared priorities.
In the upcoming budget, NDP Leader Jagmeet Singh wants the government to extend the GST rebate, which was introduced last fall and temporarily doubled the amount received, by six months.
Mr. Singh is also calling for federal funding for school meals.
Under the agreement between the two parties, the Liberals have already agreed to create a federally funded and administered dental program this year to replace the dental benefit for children of low-income families, which was implemented in the fall.
The deal also commits Justin Trudeau’s Liberals to passing national pharmacare legislation by the end of 2023, though there’s been no sign of progress on that yet.