Finance Minister Chrystia Freeland is to table her mid-year budget update in the House of Commons today focused heavily on driving investment to Canada’s clean energy industries in response to new American tax incentives signed into law last summer.
The government is already further ahead financially than expected as inflation and a stronger economic recovery drove up tax revenues.
But after years of expensive COVID-19 relief packages, Freeland is retreating to what the government believes is a fiscal position warranted by the need to reduce deficits and prepare for the likelihood of an economic recession in 2023.
“Obviously, I’m not going to scoop the minister of finance, but it is a fall economic statement that will ensure fiscal responsibility,” said Rachel Bendayan, a Liberal MP from Montreal and the parliamentary secretary to the associate minister of finance.
Freeland isn’t expected to do more to help Canadians weather the cost-of-living crisis. In September she offered up $4.5 billion to temporarily double GST rebates, create a dental care benefit for most kids under the age of 12, and offer a one-time top-up of $500 to a national low-income renters’ allowance.
That GST aid will start being felt Friday as the deposits begin to land in the bank accounts of 11 million low and moderate-income families. The legislation to create the dental benefit and housing allowance top-up is still before the Senate.
The government has signalled the mini-budget will be quite mini, focused on targeted investments rather than grand-scale new programs.
It will include a new tax on corporate stock buybacks to encourage companies to invest in their own operations and introduce new or enhanced tax incentives to aid the growth of clean energy including hydrogen.
Both are part of the Inflation Reduction Act President Joe Biden negotiated and signed into law in August. Industry players have repeatedly warned the government that Canada needs to match the U.S. or investment will flee south and put Canadians out of work.
The act includes nearly US$400 billion in tax incentives, grants and loan guarantees for clean energy sectors including electricity production, electric cars and battery manufacturing.
It also includes a one per cent tax on corporate stock buybacks, something Freeland is expected to mirror in today’s update. That falls well short of the windfall tax the NDP want Ottawa to impose on corporations they say are getting wealthy at the expense of Canadian families.
Matt Poirier, senior director of policy and government relations for Canadian Manufacturers and Exporters, told a House of Commons committee Tuesday the U.S. Inflation Reduction Act comes with red flashing warning lights all over it for Canada’s manufacturing sector.
Poirier said Canada’s response in the fall economic statement needs to include matching programs on this side of the border, or “at least signal to industry that the fix is on the way.”
Innovation Minister Francois-Philippe Champagne said Wednesday the government is on top of it.
“We will remain competitive,” Champagne told reporters following the Liberal caucus meeting. “We know that the Inflation Reduction Act in the United States and the CHIPS act is a catalyst for us to do more.”
The CHIPS act, also signed into law in August, provides US$280 billion to spur domestic research and manufacturing of semiconductors.
The Liberals have faced criticism for pandemic spending going on longer than necessary and potentially fuelling inflation. At the same time, Canada’s strong economic bounce back from the COVID-19 recession has been attributed in part to the fiscal response.
The Conservatives have led the charge against the Liberals for spending too much but the Liberal caucus is also showing signs of concern.
Thunder Bay — Rainy River MP Marcus Powlowski said it’s not so much about “reining in” spending because that presupposes that the funds Ottawa offered up to help people get through COVID-19 was out of control, “which I don’t think is the case.”
Still, Powlowski said it’s a different time now with interest rates higher and debt costs going up.
“There’s more of an opportunity to be frugal now,” he said.
Former parliamentary budget officer Kevin Page said he expects the fall economic statement to be a traditional mid-year update but could also be an opportunity for Ottawa to review its targets and rules for spending.
“It is important for monetary and fiscal policy to be working in a coherent manner,” Page said in an email.
Freeland has said on multiple occasions that the federal government will be focused on fiscal restraint as the Bank of Canada works on bringing inflation down with interest rate hikes.
Since March, it has raised its key interest rate six consecutive times, bringing it from 0.25 per cent to 3.75 per cent. The central bank has also signalled interest rates will have to go higher to bring inflation to its two per cent target.
The good news for the federal government is that its finances have been improving substantially over the last year. The same inflation that forced Canadians to pay more for groceries, gas and home heating costs helped drive up government tax revenues.
Federal coffers have also profited from Canada’s strong economic recovery from the COVID-19 pandemic and high corporate profits.