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Canada Fiscal February 2018

Canada: Federal budget projects narrower fiscal deficit in 2018–2019 amid solid economic outlook and new spending

Finance Minister Bill Morneau unveiled the Trudeau government’s moderately expansionary—and largely unsurprising—federal budget for 2018–2019 on 27 February, outlining a fiscal track that fell broadly in line with October’s Fall Economic Report. This year’s budget, which assumed a theme of gender equality and will be the Liberals’ penultimate budget before next year’s federal election, projects narrowing deficits over the medium term as the Liberals map out their plan to boost longer-term economic growth through deficit financing.

This year’s budget will come into force on 1 April amid an improving fiscal stance and the economy’s solid short-term outlook. That said, the Liberals’ budget is very much a holdover from 2017–2018, given the substantial downside economic risks that are set to intensify this year as the housing market continues cooling and the North American Free Trade Agreement (NAFTA) is renegotiated with the United States and Mexico. As a share of GDP, budgetary revenues will remain stable from a year ago at 14.5% with only minor changes to the tax code, while program expenses will tick down to 14.0% (2017–2018: 14.2%) despite CAD 9.5 billion in new spending, thanks to stronger economic growth. Notably absent from the Trudeau government’s third federal budget were any tax changes to remedy the economy’s perceived loss of fiscal competitiveness following last year’s sweeping tax overhaul in the United States.

As next year’s federal election comes into focus, the Liberals’ budget was widely expected to contain provisions for political wedge issues. Although left-leaning voters will appreciate new spending in areas such as basic research, environmental programs and Indigenous Peoples, the impact of the nearly CAD 20 billion in new spending over the medium term in this year’s budget shies in comparison to the Liberals’ first budget, which included closer to CAD 50 billion of new spending. Meanwhile, small business taxes were revised, with the budget introducing passive income caps. All told, this year’s budget strayed little from Liberal orthodoxy, which argues that responsible spending, despite deficits, should foster long-term economic growth. Morneau’s plan came with few surprises, suggesting that any game-changing budgetary measures will be saved for the 2019–2020 election-year budget.

Derek Burleton, Deputy Chief Economist at TD Economics, highlighted the lack of significant changes in the budget:

“Importantly, there was very little in today’s budget that will impact investors, whether business or individuals. Clarity was provided on the treatment of passive investment in small, private corporations, but no significant tax increases were announced despite chatter ahead of the budget that tax increases may have been coming to capital gains and stock options. […] While raising women participation rates among other priorities presented today could pay off economically over the longer run, we remain concerned about the medium-term risks surrounding the potential for a slow bleed in investment stateside in light of the improved U.S. tax position. […] Ultimately, anyone looking for a ‘big bang’ one way or the other will likely have to wait for next year’s pre-election budget.”

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