Canada’s Budget: A Missed Opportunity

By Elliott Vavitsas

After a wait of two years, Canada’s federal government finally released its budget on April 19th. Minister of Finance Chrystia Freeland has presented the budget as “a recovery plan for jobs, growth, and resilience” that “brings all Canadians along.” However, as with all government budgets, when inspecting the finer details everything is not as it seems. Instead of delivering critical and large scale investments into key sectors of the economy, the government has spread its cash too thinly and ended the status quo of a Canadian government that allows the free market and private sector to do the majority of the heavy lifting. 

Firstly though, we must look closely at what the government wants to spend on. Over the next five years, C$135.2 billion will be spent. From the hallmark programs of a federally subsidized national child care program, to a range of funds to promote infrastructure development and cutting carbon emissions, the federal budget misses the mark in as many places as it hits the target. Concerningly, it is all meant to be financed through debt. Promises have been made that things will be fine because the economy will grow to support the debt, and low interest rates will persist. We know though that low interest rates cannot continue forever, and in an economy that is already growing again  with the original 2020 stimulus package (2020 Q4 economic growth was 9.6%), even more stimulus could harm the money supply. Finally, the quirky nature of the relationship between Canada’s federal government and provinces means that every program after it is announced must be negotiated down to the wire. 

The word to describe this budget would be “bloated” and a few programs and the data behind them prove why. The newly announced Canada Recovery Hiring Program (CRHP) is a good example. Costing the government C$595 million, it is a subsidy that is meant to jump start hiring in the country running from June 6th to November 20th 2021. A blanket subsidy for hiring in all sectors, it covers a portion of employers labour costs. A program like this is needed in the hard hit hospitality sector for example, where hiring has decreased 24%. Across other industries though like finance, manufacturing, and public administration there has been growth in hiring without stimulus. Amongst all industries in Canada, there has only been a 1.5% decrease in hiring. So why is Canada budgeting to subsidise sectors that can recover alone, ultimately at the expense of the taxpayer and other sectors which would actually benefit from a targeted subsidy? Another policy, a 1% tax on property that is underused or vacant and owned by foreigners is supposed to curb the speculation and unsustainable rising prices in Canada’s housing market. However, this sidesteps the authority of municipal governments who would be able to use revenues from this tax much more effectively, and secondly is not enough of a penalty to curb rising home prices. Programs and policies like this which aim to do much but are not well thought out litter the rest of the budget, and decrease its effectiveness. 

The carbon emissions reduction efforts outlined in the 2021 budget also do not have clear priorities. Almost nine billion will be spent on incentives and developing carbon free technologies, as well as preserving nature, spread over 43 programs. Tax breaks, subsidies for retrofitting homes, and “decarbonising” grants to industries like aerospace and construction have been included. These are all noble measures to combat climate change, which should be one of the main priorities of the budget. As seen in other programs in the budget though, the effectiveness of these programs is questionable. There is a shortage of companies developing technologies that could receive these grants and tax breaks, and Canada’s heavy industry is almost non-existent. Furthermore the unaddressed brain drain that occurs with young entrepreneurs and engineers leaving Canada for the United States, UK, or Europe means that it will be hard for these subsidies to inspire a significant amount of development in the renewables sector. In the end the government might struggle to spend this money, or it will end up disappearing, which does not help anyone. 

The elephant in the room when examining this budget is the federal deficit. COVID-19 took the deficit to C$354 billion. Economic growth is supposed to offset this deficit, and could already be doing the trick, as the 2022 deficit is supposed to decline to C$154 billion assuming things go to plan. By the end of this budget’s lifespan, the deficit should be at C$54 billion. However this still represents  a deficit, and  for an economy that historically has struggled to grow when deficits are present could be problematic. Furthermore C$54 billion is about the same size as the deficit that the 2008 financial crisis inflicted on Canada. Relatively, for the long term finances of Canada, this budget takes many risks. 

Overall, we should expect some sort of increase in spending. After all, Canada is recovering, and even though much of that recovery so far has come mostly from cheap debt and a resilient private sector, getting things to the next level requires some sort of state activism in the economy. However the amount of say the current Canadian government wants in the economy going forward is a bit extreme. Furthermore, much of the money needed to finance this budget is resting on low interest rates. Those will not last forever, and could result in Canada returning to its high deficit, low growth economy of the 1970s and ’80s, rather than continuing the current model which has made a nation of 38 million enjoy the highest level of economic growth of all G7 nations since 2000.

The views expressed in this article are the author’s own and may not reflect the opinions of the St Andrews Economist.

Photo by Chelsey Faucher on Unsplash

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