This text is taken from the Courrier de l’économie of November 7, 2022. To subscribe, click here.
During the presentation of the federal economic statement last Thursday, the Liberal government did not hide its concern: Ottawa must respond to the American policy of massive investments in the fight against climate change.
More specifically, it is the Inflation Reduction Act (IRA) that is in Ottawa’s sights. This is the law passed this summer by the Biden government, which provides nearly 370 billion US dollars (about 520 billion Canadian dollars) in new spending for the fight for the energy turnaround as well as for the growth of the economy.
” It’s a game changer for climate transition and for industrial reconstruction in North America for the next few years,” a senior official from the Ministry of Finance told the media.
“I would say it’s an investment black hole! Call it what you will, but this is ambitious and aggressive industrial policy on the part of the United States,” he added.
In response, the Liberal government then announced the introduction of two new measures: an investment tax credit for clean technologies (which will cost 6.7 billion Canadian dollars over five years from 2023-2024) , as well as a clean hydrogen investment tax credit.
Ottawa also gave a little more detail about the Canada Growth Fund (CGF), endowed with a capital of 15 billion dollars, which had already been announced in the last budget. This fund aims to generate three times more investment from the private sector.
Darker days ahead
Ottawa currently has the means to make such investments and will need them to help the economy in the coming years.
In her economic update, Finance Minister Chrystia Freeland painted a picture of a federal government that will benefit from higher-than-expected revenues due to the strong economy, but also inflation, which inflates its tax revenues. Ottawa is not the only one in this situation, the provincial governments are also exceeding, and even more widely, the budgetary projections. Already, the overall deficit equivalent to 1% of the gross domestic product that was expected for the year 2021-2022 has been replaced by a surplus.
However, this situation is likely not to last, she warned. In a sign of the rapidly changing Canadian and global economic reality, the late-September forecasts from private sector economists on which the federal government based its update last week likely already underestimate the extent of the current economic slowdown.
Accordingly, officials from the Ministry of Finance also developed a scenario called the “pessimistic scenario” where, unlike the so-called “baseline” scenario – but which today, and according to the same logic, should probably be called the “pessimistic scenario” optimistic” — it is no longer a question of a constant reduction in deficits until a return to a balanced budget in 2027-2028, but rather of a “slight recession” at the start of the year, with a decline of almost 1% in gross domestic product in 2023, accompanied by deficits which would start rising again before starting to fall again more slowly.