Canada's Federal Budget: relatively restrained

Governments always try to prepare financial markets and the public in advance for the contents of their budget announcements, in the hope of preventing unduly violent reactions on the actual day. The Canadian Federal Government duly did this ahead of the 2022 budget it tabled on Thursday, but in a slightly unusual way. It made no attempt to dispel widespread speculation that Finance Minister Chrystia Freeland would be spraying money around with a firehose, aiming at social programs, defense and whatever else took her fancy. So when the actual budget proposed a deficit for the coming year of "only" C$ 52.8 billion, it was widely seen as an attempt at restraint and responsibility, exactly as the Government must have hoped. 

To be sure, there is plenty of "new" spending in the budget, amounting to over $50 billion in total, but this is spread over the full five-year budget horizon.  Given that actual spending in the fiscal year just ended (2021/22) was fully $12.5 billion lower than the Government projected just half a year ago, there must be some doubt that this money will all get spent. The appearance of restraint is also helped by the jump in revenues as the economy has emerged from the worst of the pandemic. Led by income taxes, revenues were $24.5 billion higher in FY 2021/22 than previously estimated, and over the five-year forecast horizon, they are expected to be from $10-$15 billion higher than was forecast earlier. 

As usual there are a lot of bits and pieces in the budget, but here are a few of the main themes:

• Housing is a key focus, given the steady rise in home prices in almost all areas of the country. In a nakedly populist move, the Government will ban most purchases of dwellings by foreign buyers for the next two years. There will be a new tax-free savings scheme for first time home buyers, on the lines of the existing registered retirement plans.  Individuals will only be allowed to contribute $8,000 per year to such plans, to a cumulative maximum of $40,000. With the average Toronto-area home now topping $1 billion (and $800,000 nationwide), it is hard to see this program making much difference. Indeed, the skeptical might argue that its main effect will be to boost asking prices by, just guessing here, about $40,000.
• Defense gets a significant cash injection of about $8 billion, spread over five years. A while back, The Economist described Canada's defense policy as "the True North, strong and free-loading". Even with this cash injection, defense spending will only reach 1.5 percent of GDP, against the NATO target of 2 percent. Given Ms Freeland's Ukrainian roots, it is no surprise (and definitely no criticism) to note that $500 million will be given to that country in defense aid.  Considering  Canada's frankly pathetic performance in defense procurement over many years, that contribution may be the only part of the $8 billion that will reliably get spent.
• The "green" economy gets extra funding, in support of the Government's aim of reducing Canada's carbon emissions by 40 percent by 2030. There will be a new incentive program for electric vehicle purchases. Intriguingly and not without risk, the Government seems set to rely on still-embryonic carbon capture technology to help meet its emissions goals: a new investment tax credit will be offered, costing $2.6 billion over five-years.

Reflecting these measures and the myriad other items in the budget, the Government is able to project a steadily declining path for the fiscal deficit through the five-year planning period. The $52.8 billion deficit forecast for FY2022/23 is less than half the previous year's level. It is projected to fall below $40 billion in FY2023/24 and then to less than $10 billion by FY 2026/2027. The debt/GDP ratio is expected to fall from 45.1 percent this year to 41.5 percent by FY2028/2027. Both the dollar deficits and the debt/GDP numbers are lower than previously expected, despite the new spending measures.

In all then, not the orgy of spending that some in the markets and the media had feared. There will be sighs of relief at the Bank of Canada that fiscal policy is not set to make its job much more difficult in the months and years ahead.