19 Oct, 2017

TACTIX: 2017 Federal Budget Analysis

Budget 2017: Focusing on Canada's Middle Class -The Sequel
19 Oct, 2017

Offence Sells Tickets, Defence Wins Championships

As Finance Minister Bill Morneau pondered over the contents of the budget he tabled in the House of Commons on March 22nd, the political landscape confronting him looked considerably different in March 2017 than it did when the budget-making process began in earnest early last fall. Unforeseen was the outcome of the U.S presidential election on November 8, 2016. The inauguration of Donald Trump as the 45th President of the United States in January 2017 gave birth to an “America First” administration bent on changing the rules of the game as they had been understood in North America for at least the past three decades.

It was against this backdrop that Minister Morneau, his officials at Finance Canada, as well as the Prime Minister and his senior advisors in the PMO, kept one eye firmly focused on developments south of the border that could dramatically affect the economic well-being of Canadians – portends of a Border Adjustment Tax, a ‘Buy America” regime, a dramatically reduced corporate tax rate, and a radically altered NAFTA – at the same time as they offered more shape to many of the initiatives launched in the government’s first budget last year. The relative modesty of Budget 2017 compared to 2016 testifies to the degree of uncertainty in the economy and how things may unfold in the United States.

Understanding that offence sells tickets but defence wins championships, as departments were providing Finance Canada with their budgetary “asks” they were in turn asked to assess the potential impact of their wish list on Canada-U.S. relations. With this “scrubbing” process completed, Minister Morneau stood up in the House of Commons and delivered his second budget speech, entitled Building a Strong Middle Class.

Setting the Political Course – Training for the Jobs of Tomorrow

Budgets are political documents. While they include a current assessment of the Canadian economy and assign dollar values to a multitude of government initiatives, the true significance of budgets is that they signal the direction in which the political winds are blowing. Not surprisingly, the political winds continue to blow in the direction of middle class Canadians. After all, the Liberals received a majority mandate in 2015 on an electoral platform focused on advancing the interests of Canada’s middle class.

In an environment of uncertain times ahead and very little wiggle room in the fiscal framework due at least in part to reduced revenue from royalties resulting from lower commodity prices, this translates primarily into measures aimed at creating new, and protecting existing, jobs.

Although Prime Minister Trudeau did not emulate former Prime Minister Chrétien with the latter’s famous mantra of “jobs, jobs, jobs”, Budget 2017 demonstrates that the ship of state clearly is sailing in that direction, with a government emphasis on middle class Canadians. Central to this theme are investments in training for adults displaced by technology, education for youth in the digital skills of today and tomorrow, and helping employers bring in the skilled workers they need from a global talent pool.

Minister Morneau’s second budget is styled as a “roadmap” for the future of Canadian skills and workforce development in an innovative economy. An additional $1.8 billion will be invested in Labour Market Development Agreements over the next six years. These agreements currently transfer from the federal government to the provinces and territories approximately $2 billion in training programs.

To address historical inequities in the system for workers who are not Employment Insurance eligible, the government will make $900 million available over six years for Workforce Development Agreements by consolidating a number of previous initiatives. This funding will be accessible through provincial and territorial governments.

A central proposal from the Finance Minister’s Advisory Council on Economic Growth, chaired by McKinsey’s Dominic Barton, has been adopted in Budget 2017. The budget proposes $225 million over four years, starting in 2018-19, to be dedicated to working with willing provinces and territories, the private sector, educational institutions, and not-for-profit organizations to improve skills development and the measurement thereof.

The government is committed to streamlining the Temporary Foreign Worker Program. A Global Talent Stream is added to the program to fast track highly skilled workers that employers need most urgently. Processing times and paperwork requirements for some employers and workers should decrease substantially.

Moreover, the budget reaffirms the thirty-day visa commitment recommended by the Finance Minister’s Advisory Council and noted in the Fall Economic Statement. Details on the program were not outlined fully in the budget but will be released in the coming months.

Snapshot: Canada’s Fiscal Condition

Budgetary Deficit: Budget 2017 projects Canada’s deficit will drop from $28 billion in 2017-18 to $18.8 billion by 2021. This reinforces the conclusion many reached following Budget 2016 and Minister Morneau’s Fall Economic Statement that the government will not deliver on its election campaign commitment to balance the books in time for the next federal election in 2019. Notably, the budget does not set out a plan for the government to get back to balance.

Debt-to-GDP Ratio:

Federal debt as a percentage of GDP is forecast to remain fairly stable through to fiscal 2021-22. It is projected to be 31.5 per cent this year, shrinking slightly to 30.9 per cent in 2021-22. The government defends itself by noting that Canada’s debt-to-GDP ratio remains the lowest of any G7 country.

Tactix: 2017 Federal Budget Analysis

Taxes: Concern that the government would increase the capital gains tax in this budget proved to be unwarranted. Taxes were increased, however, on “the usual suspects”, namely cigarettes and alcohol. Moreover, the government will:

  • Amend the definition of a taxi business under the Excise Tax Act to ensure that ride-sharing businesses such as Uber are subject to the same GST/HST rules as taxis.
  • Eliminate the Public Transit Tax Credit introduced by the Conservative government.
  • Examine aggressive tax planning through private Canadian company activities that reduce personal income tax liabilities.

Expenditure Management Review: The government will launch three new expenditure management initiatives to monitor spending writ large across government, in the hope of freeing up funds for reallocation:

  • An in-depth examination of at least three government departments (not yet identified).
  • A horizontal examination of federal fixed assets (e.g. laboratories, bridges).
  • Simplified programming and better aligned resources across departments to improve the effectiveness of innovation programs.

Budget Impact on Canada’s Business Community

As always, TACTIX keeps a close watch on political developments and public policy issues of interest and importance to our clients. To that end, in the Annex we examine the contents of Budget 2017 as they relate to seven key sectors of the Canadian economy:

  1. Agriculture and Agri-Food
  2. Defence, Security and Procurement
  3. Digital Economy
  4. Energy, Resources, Environment
  5. Infrastructure
  6. Manufacturing
  7. Transportation

In Closing

The government deliberately timed Budget 2017 to be delivered just prior to a one week break in the House of Commons schedule. This gives the Prime Minister, Cabinet Ministers and Liberal MPs the opportunity to travel to provincial capitals and key foreign capitals, as well as to their respective constituencies, to sell the virtues of their new budget. To that end, PMO has scheduled a two-day caucus retreat for Friday, March 24 and Saturday, March 25. Liberal MPs will be given the key messages they will be called upon to deliver to their local media outlets, through various social media avenues and in conversations with their constituents during the break week. There are enough bits and pieces sprinkled throughout the budget to provide government Members with sufficient content for local media interviews, Twitter, Facebook, and service club luncheon speeches.

It is highly likely that this is NOT the budget the government had anticipated would shape its second-plus year in office. Many important issues are kicked down the field, to be picked up another day. It does not include, for example, any significant new revenue sources that a cash-starved government undertaking a steely-eyed review of costly tax expenditures might yield.

Budget 2017 is clearly a product of its time – little room in the fiscal framework to be bold and an unpredictable next door neighbour upon whom Canada’s economic health and vitality are so heavily linked who hasn’t yet revealed his hand. It makes one think that some of the tougher decisions may emerge when Minister Morneau releases his Economic Statement – a de facto mini-budget – this fall.

We await the sound of the second shoe dropping.

Annex: Sector-By-Sector Measures

1. Agriculture and Agri-Food

March 22nd can be considered a good day for Canada’s agricultural and agri-food sector. In February 2017, the Advisory Council on Economic Growth identified the ag-food sector as having untapped potential to spur economic growth. The Council recommended that the government look seriously at supporting ag-food innovation and take a bold approach to advancing ag-food growth and innovation.

The budget embraces the Council’s recommendation, describing agri-food as one of Canada’s highly innovative industries with the “greatest potential to accelerate economic growth”. Details are to follow regarding a $950 million fund set aside over five years to support a small number of “superclusters”, including the agri-food sector.

Agriculture is also starting to be integrated into whole-of-government thinking. Budget 2017 incorporates agri-food into the newly designed $1.26 billion Strategic Innovation Fund aimed at consolidating and simplifying existing business innovation programs.

The budget also provides $70 million over 6 years for agricultural discovery science and innovation, with a focus on climate change and soil and water conservation. Furthermore, Budget 2017 offers $149.3 million over five years, starting in fiscal 2017-18, to renew core food safety inspection programming delivered by the Canadian Food Inspection Agency and Health Canada.

2. Defence, Security and Procurement

From the 30,000 foot level, the Department of National Defence is doing its part keeping the deficit as low as possible. Defence analyst Dave Perry sums it up in the title of his commentary: Bad News for Defence: Budget 2017″. With $83 billion in large-scale projects now spread out over 30 years, capital expenditures can be delayed, moved from the short term to some later date depending upon how the accrual portfolio is managed. As the popular expression goes, funding for defence looks like a hockey stick: flat in the short term, with an upward tick in spending off somewhere in the distance.

There are growing opportunities for defence companies that can connect to the government’s commitments to the advanced manufacturing sector. The Strategic Aerospace and Defence Initiative (SADI) is merging with three other programs to create one “Strategic Innovation Fund” that will no longer exclusively provide refundable grants – non-refundable grants are coming.

The yet-to-be-announced Defence Policy Review will face the difficult task of managing two opposing forces: NATO allies calling on Canada to contribute more to defence, while at the same time working within existing resources. With this in mind, Budget 2017 restates the government’s commitment to move ahead with the interim replacement to fighter jets and a transparent competition within its current mandate.

With regard to government procurement, Budget 2017 provides for renewal of the Cost and Profit Assurance Program at $3 million per year for two years, starting in 2017–18. This measure is aimed at providing clarity to businesses and to ensuring that procurement continues to be fair and transparent both to Canadian businesses and taxpayers.

3. Digital Economy

The budget reaffirms the government’s focus and commitment to Canada’s digital future. A series of interesting initiatives were announced, including:

  • To retain and attract top academic talent, and to increase the number of postgraduate trainees and researchers studying artificial intelligence and deep learning, Budget 2017 proposes to provide $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent.
  • A new intellectual property strategy will be coming later in 2017 aimed at modernizing and supporting Canadian ideas for the 21st century.
  • To help provide coding and digital skills education to young Canadians, the government will launch a competitive process through which digital skills training organizations can apply for funding. The budget provides $50 million over two years, starting in 2017–18, to support these teaching initiatives.
  • In light of the rapid pace of change in digital broadcasting and digital content creation, the government proposes a review and modernization of the Broadcasting Act and the Telecommunications Act in the coming months.
  • Funding will be available to help Canadians prepare for the economy of tomorrow by promoting the development of science, technology, engineering and mathematics (STEM) skills and digital literacy, particularly for women, girls and underrepresented groups.

4. Energy, Resources, Environment

The Government of Canada is focusing on incentives to assist in a transition to a lower-carbon emitting economy. Budget 2017 emphasizes the clean energy and environmental commitments of Budget 2016. Primarily, the budget promises to support the implementation of the Pan-Canadian Framework on Clean Growth and Climate Change through $21.9 billion in green infrastructure investments. The budget outlines three streams for Canada’s transition to a clean economy to guide decision making:

  • $9.2 billion on bilateral agreements with provinces and territories on “green” initiatives to support priority projects.
  • $5 billion through the Canada Infrastructure Bank for green projects.
  • $2.8 billion in national programs for disaster recovery from climate change effects, renewable electricity projects, various infrastructure items for electric vehicles and building retrofits. Budget 2017 provides access to $1.4 billion in financing for “clean technology companies”, facilitated by the Business Development Bank of Canada and Export Development Corporation. These lending facilities will include working capital loans ($570 million), equity investments ($380 million), and specific project financing for private sector companies ($450 million). In addition, the 2016 SD Tech Fund will be replenished with $400 million in fresh capital for private sector projects focused on sustainable development, climate change, air quality, clean water and clean soil.

The government reaffirmed its commitment to junior mining and exploration companies with the re-announcement of the extension of the Mineral Exploration Tax Credit. Moreover, the government will invest $30 million in the Government of Alberta to stimulate economic activity in the natural resource sector.

Energy sector R&D is also a focus of the budget. The government commits $229 million over four years to NRCan for research in clean energy and clean transportation programming. In addition, $200 million over four years is committed for research demonstration and adoption of clean technology in the natural resources sector. The budget also makes an energy infrastructure investment of $17 million for pipeline safety oversight to the National Energy Board. Finally, the government recognizes the significant potential of geothermal energy by expanding capital cost allowances for clean energy generation and energy efficiency capital assets.

5. Infrastructure

Given the significant focus on infrastructure investments in Budget 2016, augmented in the Fall Economic Statement, Budget 2017 does not put additional infrastructure money on the table. However, a few key items of interest relating to infrastructure investments were incorporated in the budget, including:

  • Launching a process to identify the Canada Infrastructure Bank’s Chief Executive Officer and Chairperson of the Board of Directors, with the goal of having the Bank operational in late 2017.
  • To help municipalities better track, collect, use and share the data needed to measure the impact of infrastructure investments, the government and the Canada Infrastructure Bank will work in partnership with provinces, territories, municipalities and Statistics Canada to undertake a data initiative on Canadian infrastructure.
  • To promote closer, more effective collaboration between governments, the government will work with provincial and territorial partners to establish and support infrastructure outcomes that make sense for Canadians—whether new investments in public transit or more support for cultural infrastructure.
  • Providing $16.4 million over five years, starting in 2017–18, to Transport Canada to ensure that Canada’s federally managed roads, bridges, rail systems and ports are able to withstand the effects of natural disasters, climate change and extreme weather events.
  • Developing a new, cost-shared Disaster Mitigation and Adaptation Fund for built and natural, large-scale infrastructure projects supporting mitigation.

6. Manufacturing

Advanced manufacturing is identified as one of six innovation clusters to be nurtured by Innovation Canada. Economic Strategy Tables in advanced manufacturing, agri-food, clean technology, digital industries, health/bio-sciences and clean resources will be established with a mandate to:

  • Set ambitious growth targets for Canadian innovators.
  • Identify sector-specific challenges and “bottlenecks” to innovation as well as barriers to greater participation across gender lines.
  • Lay out specific strategies to help innovators achieve their targets.
  • Guide the government’s efforts to provide relevant and effective programs for Canada’s innovators.

Budget 2017 proposes to create a new $1.26 billion five-year Strategic Innovation Fund to consolidate and simplify existing business innovation programming, in particular the Strategic Aerospace and Defence Initiative, Technology Demonstration Program, Automotive Innovation Fund and Automotive Supplier Innovation Program. With a single, streamlined fund that will include non-repayable grants, the government aims to provide businesses with a simpler application process, more timely processing, and assistance that is more responsive and focused on outcomes.

The Strategic Innovation Fund is intended to attract and support new high-quality business investments and will continue to be available to aerospace and automotive firms, while also expanding its support to other dynamic and emerging sectors, such as clean technology and agri-food.

7. Transportation

Canada’s transportation future is evolving rapidly, in large part due to emerging technologies. Recognizing the intersection of technological and environmental advances, particularly in the automotive sector, the government proposes to invest $120 million over several years to deploy infrastructure for electric vehicle charging and natural gas and hydrogen refuelling stations, as well as to support technology demonstration projects.

Budget 2017 proposes to develop greenhouse gas regulations in the marine, rail, aviation and vehicle sectors, led by Transport Canada. The budget also proposes to provide $17.2 million over five years, starting in 2017–18, to Environment and Climate Change Canada and Transport Canada to develop and implement heavy-duty vehicle retrofit and off-road regulations, as well as a clean fuel standard to reduce emissions from fuels used in the transportation, building and industrial sectors.

In addition, congestion and efficiencies at ports, rail terminals and busy highway corridors are being targeted in the National Trade Corridor Fund. The budget promises $2 billion will be allocated over eleven years for this fund.

In case you missed it, check how the opposition parties and others reacted to Budget 2017:

Conservative Party of Canada

The reality is Justin Trudeau is focused on everything but regular Canadians’ top priorities, says Ambrose.

Watch on Facebook live as Rona Ambrose provides the Conservative response to Budget 2017.

National Democratic Party

Budget 2017 disappoints on building a fair economy

Canadians struggling with precarious employment, rising costs, and record household debt got little in the Liberal budget to make Canada’s economy work for them, while the wealthy and well-connected were rewarded.

Green Party of Canada

Budget 2017: Fossil fuel subsidies, stock option loophole continue; climate action inches forward

Innovation and Environment Canada are the big winners, but the continuation of fossil fuel subsidies and lucrative stock option loopholes are unaffected by Budget 2017.


Federal budget 2017: Highlights of Bill Morneau’s 2nd budget

The budget revises the deficit for the year just ended, rising slightly to $23 billion, and forecasts a deficit for the coming year of $28.5 billion, including a $3-billion “risk adjustment.”


Budget 2017: Cash crunch leaves Liberals with little new spending

The federal government is offering almost no new spending in the 2017 budget, a document that brings into focus already announced funding amid an economic crunch.

National Post

John Ivison: The Liberals may have slowed their spending, but their spin is relentless

The 2017 budget has the virtue of being as thin as a conscientious supermodel – 2787 pages of flowery verbiage dressed up in the thin veneer of marketing speak.

The Globe and Mail

Liberals defer major tax pledge in 2017 federal budget

Finance Minister Bill Morneau has put off tax hikes on wealthier Canadians, delivering a budget Wednesday that promised new money for job training,child care and social housing but offers no plan to improve the country’s debt outlook.

La Presse

Les points saillants du budget fédéral

Le gouvernement prévoit des déficits de 28,5 milliards $ pour l’année financière 2017-2018, puis de 27,4 milliards $ en 2018-2019, 23,4 milliards $ en 2019-2020, 21,7 milliards $ en 2020-2021 et 18,8 milliards $ en 2021-2022.

Montreal Gazette

Federal budget 2017: Quebec blasts Ottawa over lack of infrastructure cash

Using strong language for what is a federalist government, two top Quebec cabinet ministers blasted Ottawa Wednesday, saying the province is “extremely disappointed and disconcerted,” the federal government failed to deliver infrastructure cash.

Canadian Chamber of Commerce

More Urgency Needed to Close Canada’s Competitiveness Gap

“While we welcome specific measures in the budget on skills and innovation, our international competitors are racing ahead,” said the Hon. Perrin Beatty, President and CEO of the Canadian Chamber of Commerce.

Canadian Manufacturers & Exporters

Canadian Manufacturers Applaud Government Action to Support Advanced Manufacturing

“This is a budget that puts innovation where it belongs – as a driving force behind strategies for long-term growth in manufacturing and trade to build a better future for middle-class Canadians,” said CME President & CEO Dennis Darby upon his review of the Budget.


2017 Federal Budget Highlights

The budget continues the government’s strong focus on innovation and skill development. Although the budget did not feature significant tax changes, it does include many measures that affect Canadian businesses and individuals.


2017-2018 federal budget highlights – Canadian tax alert

Albert Baker, Canadian Tax partner and Global Tax Policy leader, offers his insights on the corporate tax measures contained in the 2017-2018 federal budget, reviewing both domestic and international tax proposals.