Budget 2023 – Everything, Everywhere, All At OnceBudget 2023 – Everything, Everywhere, All At Once
Less than a week after the star-studded State Dinner to honour President Joe Biden and the Canada/US relationship, you’d be forgiven for thinking we’re still talking about this year’s Best Picture Oscar winner. Budget day is finally upon us, however, and this year’s edition provides a case-study in the constraints that ultimately restrain a government when, for the better part of the last decade, it has diluted its fiscal capacity by working to address so many priorities, for so many constituencies, with so little focus (though we’ll cut the Liberal Government some slack for its management of the global pandemic, keeping Canadians and the economy afloat).
At a time when the Liberal Government of Prime Minister Justin Trudeau needs more room to maneuver than ever to survive the political headwinds caused by persistent inflation in housing, energy prices, and food, the disruptive “zero-carbon” peer pressure caused by the USA’s seismic Inflation Reduction Act (IRA), its handling of Chinese foreign election interference, and growing pressure on North America’s continental defence, its “everything, everywhere, all at once” approach to governing may finally be showing its limits.
With limited fiscal room for maneuvering, this year’s budget focused heavily on funding items – such as healthcare funding – which are unlikely to generate new political goodwill, while acknowledging its limited ability to address pocket-book issues such as housing and affordability.
This challenge was exacerbated by the departure of Tyler Meredith – the architect of the last three budgets delivered by this government – for the private sector. To address this policy gap, along with the political pressures of the moment, Team-Trudeau turned to veritable political Swiss-army-knife Jeremy Broadhurst, who has served as Policy Advisor to Ministers of Foreign Affairs and National Defence, as Chief of Staff to Chrystia Freeland when she served as Foreign Affairs Minister, as National Director of the Liberal Party of Canada, and as Deputy Chief of Staff to the Prime Minister.
In spite of his geopolitical credentials, some of the omissions in this year’s budget will undoubtedly disappoint the defence and foreign policy establishment.
Is There Evidence of Fiscal Restraint?
The big news is that Budget 2023 is predicting a deficit of $43.0B for 2022-2023 – an increase of over 18% compared to the most recent forecasts of Finance Canada – and a deficit of $40.1B in 2023-2024, with the deficit predicted to shrink to $14B by 2027-2028. Despite the smaller than expected reduction in the deficit, Canada is still on track to have the smallest deficit in the G7 this year and next, so long as it embraces more deliberate deficit-cutting measures in future budgets.
Some of these cuts will come through a somewhat optimistic plan to save $7.1B over five years through cuts to travel expenses and outsourcing. Government is hoping to demonstrate its ability to be fiscally responsible and, at the same time, put to bed a political problem that has been wending its way through House committees – namely, its reliance on professional services. To fully appreciate how challenging it will be to realize these savings, please review our analysis of the government’s spending on professional services at the end of this commentary.
A “Clean” Industrial Revolution… or Green with Envy?
While coal-fired steam powered the world’s first industrial revolution, Henry Ford’s mass production in the automotive sector the second, and digitalization the third, with this budget, the Government is charting its course to establish Canada’s place in a fourth industrial revolution: the “clean” one. Coal is “out”, but the advanced manufacturing sector’s clean, green future figures prominently in this budget.
That comes as no surprise, since President Biden firmly threw the clean industry gauntlet down with the Inflation Reduction Act last year. Canada had little choice but to respond and build on the government’s efforts to establish an internationally competitive ‘clean’ economic engine. That is no surprise given the repeated announcements over the last year by Canada’s salesman-in-chief, Industry Minister François-Philippe Champagne, a tireless promoter of the government’s work to develop an electric vehicle ecosystem “from mines to mobility.” The Liberal government’s response to President Biden’s Inflation Reduction Act challenge also has vital geo-political implications. The growing aggression of China and Russia has spurred a realignment of the global, rules-based trading order that took shape in the decades following the Second World War.
This realignment is led by the United States, Canada’s most important trading and defence partner. The Trudeau government is reading the geo-political tea leaves, and aligning Canada’s interests accordingly.
Budget 2023 proposes a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies, and extract, process, or recycle key critical minerals. This investment tax credit is expected to cost $4.5B over five years, starting in 2023-2024, and an additional $6.6B from 2028-2029 to 2034-2035. It also proposes an additional $500M over ten years to the Strategic Innovation Fund to support innovation in clean technologies in Canada.
While these proposals make life easier for clean energy entrepreneurs who already benefit from previous measures to pivot to a clean economy, where does that leave everyday Canadians who don’t yet participate in these industries? Some cleaner products to use, if they can afford them, and the potential of new jobs down the road.
More likely, today, they will be left green with envy. This tension is an opportunity that Conservatives can use for the foreseeable future, especially given the mostly symbolic nature of this budget’s affordability measures.
Stitching Together an Ailing Health Care System
Last month, the federal government gave the provinces and territories an offer they could not refuse, increasing funding for Canada’s badly strained health care system. Learning lessons from past federal-provincial-territorial agreements, the federal government is requiring more transparency on provincial and territorial health spending.
Implementing increases to the Canada Health Transfer, Budget 2023 also increases personal health worker wage support, and the renewal of the Territorial Health Investment Fund by $46.2B over the next decade.
The NDP successfully pushed the Liberals on dental care for low-income Canadians. Budget 2023 proposes a new dental care plan for uninsured Canadians with family income below $90,000 a year, and eliminates co-pays for families earning less than $70,000. The Canadian Dental Care Plan will cost the government $13B over five years and $4.4B per year thereafter. The plan will be augmented by the Oral Health Access Fund, which provides $250M over three years and $75M ongoing for oral health gaps in vulnerable and remote populations.
Affordability – The Road to Canadians’ Hearts Starts at Home
Before Chinese election interference rocked the Liberal government, rapid inflation was already eating away at its popularity. Conservative Party leader Pierre Poilievre positioned his party as the logical political home for Canadians who struggle to make ends meet.
While fiscal restraint is important, it is a political imperative for the Liberal government to show Canadians that it has the affordability of their day-to-day lives firmly in mind. This will determine if Canadians looking to buy a first home, rent an apartment, or keep food on the table can stomach a vote for the incumbent government.
Budget 2023 proposes $2.4B to help low- and middle-income households with an increased GST tax credit, newly branded the Grocery Rebate. Budget 2023 also proposes to limit junk fees such as roaming fees, baggage fees and surcharges on events and concerts, as well as to introduce changes to the criminal code to lower interest rates from 47% APR to 35% APR.
More Canadians will now be eligible to file their tax returns over the phone using File My Return and the CRA will be piloting a new automatic filing service that will help vulnerable Canadians access the benefits they deserve. These measures should triple the number of people receiving automatic tax filing service.
Budget 2023 also announced a Tax-Free First Home Savings Account, which allows first time home buyers to save $40,000 tax free towards a down payment. To ensure more housing supply, the government also reallocated funding from the maintenance stream of the of the National Housing Co-Investment Fund to the new construction stream.
Canada Student Grants will be increased by 40% for full-time students, the Canada Student Loan limit will be increased from $210 to $300 per week of study and waives the requirement for mature students to undergo credit screening when applying for federal grants and loans for the first time.
Defence Remains a Foreign Affair
Budget 2023 offers a symbolic response to foreign election interference with a $48.9M investment over three years to the RCMP to protect Canadians from harassment and intimidation, and $13.5M over five years to Public Safety to establish a National Counter-Foreign Interference office.
In keeping with a now tiresomely predictable tendency – and in spite of months of new rhetoric on the importance of investing in North American continental security – the Budget proposes no new money for defence.
Canada’s support for Ukraine did translate into $200M for donations of military equipment, including eight Leopard 2 tanks, and a loan of $2.4B to Ukraine through the IMF.
No new spending for capital projects can be found in this budget, even for NORAD. While President Biden sang the praises of the alliance in Parliament last week, not a single dollar of new funding was to be found by his adoring audience.
Supply and Confidence: “In for a Penny, In for a Pound”
The Government has been working closely with the NDP to maintain the supply and confidence agreement and avoid an unwanted election. While the relationship remains strong and a spring or summer election seems to have been averted, the Liberals are now inextricably tied to their promise to implement a full dental coverage plan for Canadians by 2025, and increase financial supports for Canadians suffering from inflation.
A Seinfeld Budget…
CTV News took the unprecedented step of breaking away from its live coverage of the budget speech after only two and a half minutes, selecting instead to move straight to commentary from third-parties. The message: when you strip a budget of any surprises and lean into your tendency to be everything, everywhere, all at once, your plan comes dangerously close to becoming a budget about nothing.
Nothing – no election, no non-confidence motion, no immense grievance, no immediately detectable relief from the current pinch of inflation, no new grief, no complicated new policy prescriptions to explain from scratch – will emerge from this budget.
And that is the point. By choosing to focus on three major initiatives that it hopes will satisfy Canadians, the Government has given itself the opportunity to fight another day, and reset in advance of a future election.
Finally, by investing so deeply on its transition to a clean economy, it has armed itself with an opportunity to once more attempt what it has so far been unable to achieve since Justin Trudeau became Leader of the Liberal Party, namely make the environment and a clean economy transformation the ballot-question in a federal election.
Budget 2023, A $7 Billion Odyssey
In today’s Budget, Finance Minister Freeland announced plans to reduce expenditures such as management consulting, other services, and travel by $7.1B over five years. Of note, “the government will focus on targeting these reductions on professional services, particularly management consulting.”
The often-cited figure of $20B for professional services needs to be taken with a grain of salt. The Public Accounts of Canada, which are tabled in the House of Commons every October, is a wealth of information about how the government spends funds on its operations. However, one needs to be cautious about drawing conclusions due in part to the poor classification and nature of the recorded expenses.
For example, in the fiscal year 2021-2022, of the $17.5B spent on Professional Services – fully $4.8B was government-to-government transfers (gray slice below). As odd as it may seem, the government accounts for services that one department acquires from another department or level of government in the Professional Services volume of the Public Accounts. We recast some of the expense categories to get a better sense of where money is actually spent.
Allocation of $17.5 Billion Professional Services Expenses
Public Accounts of Canada 2021-2022
($ Millions)
Taking a closer look at the payments recorded in the Public Accounts, approximately 25% – $3B – was paid to firms that provided “business services”, “temporary help”, or staff augmentation (dark blue and dark gray slices). In contrast, when the expenses for “management consulting” (green slice) amount to only $537M and “informatics services” (dark blue slice) amounts to $1.1B. Combined, these two categories add up to ~ $1.7B – which happens to be the amount of ongoing savings the Minister of Finance has called for.
Our sympathies go out to those in government tasked with finding $7.1B of savings over five years. Perhaps if the Receiver General and the Treasury Board Secretariat just acknowledged reality when accounting for government transfers – the government could “save” $25B over five years.
Less than a week after the star-studded State Dinner to honour President Joe Biden and the Canada/US relationship, you’d be forgiven for thinking we’re still talking about this year’s Best Picture Oscar winner. Budget day is finally upon us, however, and this year’s edition provides a case-study in the constraints that ultimately restrain a government when, for the better part of the last decade, it has diluted its fiscal capacity by working to address so many priorities, for so many constituencies, with so little focus (though we’ll cut the Liberal Government some slack for its management of the global pandemic, keeping Canadians and the economy afloat).
At a time when the Liberal Government of Prime Minister Justin Trudeau needs more room to maneuver than ever to survive the political headwinds caused by persistent inflation in housing, energy prices, and food, the disruptive “zero-carbon” peer pressure caused by the USA’s seismic Inflation Reduction Act (IRA), its handling of Chinese foreign election interference, and growing pressure on North America’s continental defence, its “everything, everywhere, all at once” approach to governing may finally be showing its limits.
With limited fiscal room for maneuvering, this year’s budget focused heavily on funding items – such as healthcare funding – which are unlikely to generate new political goodwill, while acknowledging its limited ability to address pocket-book issues such as housing and affordability.
This challenge was exacerbated by the departure of Tyler Meredith – the architect of the last three budgets delivered by this government – for the private sector. To address this policy gap, along with the political pressures of the moment, Team-Trudeau turned to veritable political Swiss-army-knife Jeremy Broadhurst, who has served as Policy Advisor to Ministers of Foreign Affairs and National Defence, as Chief of Staff to Chrystia Freeland when she served as Foreign Affairs Minister, as National Director of the Liberal Party of Canada, and as Deputy Chief of Staff to the Prime Minister.
In spite of his geopolitical credentials, some of the omissions in this year’s budget will undoubtedly disappoint the defence and foreign policy establishment.
Is There Evidence of Fiscal Restraint?
The big news is that Budget 2023 is predicting a deficit of $43.0B for 2022-2023 – an increase of over 18% compared to the most recent forecasts of Finance Canada – and a deficit of $40.1B in 2023-2024, with the deficit predicted to shrink to $14B by 2027-2028. Despite the smaller than expected reduction in the deficit, Canada is still on track to have the smallest deficit in the G7 this year and next, so long as it embraces more deliberate deficit-cutting measures in future budgets.
Some of these cuts will come through a somewhat optimistic plan to save $7.1B over five years through cuts to travel expenses and outsourcing. Government is hoping to demonstrate its ability to be fiscally responsible and, at the same time, put to bed a political problem that has been wending its way through House committees – namely, its reliance on professional services. To fully appreciate how challenging it will be to realize these savings, please review our analysis of the government’s spending on professional services at the end of this commentary.
A “Clean” Industrial Revolution… or Green with Envy?
While coal-fired steam powered the world’s first industrial revolution, Henry Ford’s mass production in the automotive sector the second, and digitalization the third, with this budget, the Government is charting its course to establish Canada’s place in a fourth industrial revolution: the “clean” one. Coal is “out”, but the advanced manufacturing sector’s clean, green future figures prominently in this budget.
That comes as no surprise, since President Biden firmly threw the clean industry gauntlet down with the Inflation Reduction Act last year. Canada had little choice but to respond and build on the government’s efforts to establish an internationally competitive ‘clean’ economic engine. That is no surprise given the repeated announcements over the last year by Canada’s salesman-in-chief, Industry Minister François-Philippe Champagne, a tireless promoter of the government’s work to develop an electric vehicle ecosystem “from mines to mobility.” The Liberal government’s response to President Biden’s Inflation Reduction Act challenge also has vital geo-political implications. The growing aggression of China and Russia has spurred a realignment of the global, rules-based trading order that took shape in the decades following the Second World War.
This realignment is led by the United States, Canada’s most important trading and defence partner. The Trudeau government is reading the geo-political tea leaves, and aligning Canada’s interests accordingly.
Budget 2023 proposes a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies, and extract, process, or recycle key critical minerals. This investment tax credit is expected to cost $4.5B over five years, starting in 2023-2024, and an additional $6.6B from 2028-2029 to 2034-2035. It also proposes an additional $500M over ten years to the Strategic Innovation Fund to support innovation in clean technologies in Canada.
While these proposals make life easier for clean energy entrepreneurs who already benefit from previous measures to pivot to a clean economy, where does that leave everyday Canadians who don’t yet participate in these industries? Some cleaner products to use, if they can afford them, and the potential of new jobs down the road.
More likely, today, they will be left green with envy. This tension is an opportunity that Conservatives can use for the foreseeable future, especially given the mostly symbolic nature of this budget’s affordability measures.
Stitching Together an Ailing Health Care System
Last month, the federal government gave the provinces and territories an offer they could not refuse, increasing funding for Canada’s badly strained health care system. Learning lessons from past federal-provincial-territorial agreements, the federal government is requiring more transparency on provincial and territorial health spending.
Implementing increases to the Canada Health Transfer, Budget 2023 also increases personal health worker wage support, and the renewal of the Territorial Health Investment Fund by $46.2B over the next decade.
The NDP successfully pushed the Liberals on dental care for low-income Canadians. Budget 2023 proposes a new dental care plan for uninsured Canadians with family income below $90,000 a year, and eliminates co-pays for families earning less than $70,000. The Canadian Dental Care Plan will cost the government $13B over five years and $4.4B per year thereafter. The plan will be augmented by the Oral Health Access Fund, which provides $250M over three years and $75M ongoing for oral health gaps in vulnerable and remote populations.
Affordability – The Road to Canadians’ Hearts Starts at Home
Before Chinese election interference rocked the Liberal government, rapid inflation was already eating away at its popularity. Conservative Party leader Pierre Poilievre positioned his party as the logical political home for Canadians who struggle to make ends meet.
While fiscal restraint is important, it is a political imperative for the Liberal government to show Canadians that it has the affordability of their day-to-day lives firmly in mind. This will determine if Canadians looking to buy a first home, rent an apartment, or keep food on the table can stomach a vote for the incumbent government.
Budget 2023 proposes $2.4B to help low- and middle-income households with an increased GST tax credit, newly branded the Grocery Rebate. Budget 2023 also proposes to limit junk fees such as roaming fees, baggage fees and surcharges on events and concerts, as well as to introduce changes to the criminal code to lower interest rates from 47% APR to 35% APR.
More Canadians will now be eligible to file their tax returns over the phone using File My Return and the CRA will be piloting a new automatic filing service that will help vulnerable Canadians access the benefits they deserve. These measures should triple the number of people receiving automatic tax filing service.
Budget 2023 also announced a Tax-Free First Home Savings Account, which allows first time home buyers to save $40,000 tax free towards a down payment. To ensure more housing supply, the government also reallocated funding from the maintenance stream of the of the National Housing Co-Investment Fund to the new construction stream.
Canada Student Grants will be increased by 40% for full-time students, the Canada Student Loan limit will be increased from $210 to $300 per week of study and waives the requirement for mature students to undergo credit screening when applying for federal grants and loans for the first time.
Defence Remains a Foreign Affair
Budget 2023 offers a symbolic response to foreign election interference with a $48.9M investment over three years to the RCMP to protect Canadians from harassment and intimidation, and $13.5M over five years to Public Safety to establish a National Counter-Foreign Interference office.
In keeping with a now tiresomely predictable tendency – and in spite of months of new rhetoric on the importance of investing in North American continental security – the Budget proposes no new money for defence.
Canada’s support for Ukraine did translate into $200M for donations of military equipment, including eight Leopard 2 tanks, and a loan of $2.4B to Ukraine through the IMF.
No new spending for capital projects can be found in this budget, even for NORAD. While President Biden sang the praises of the alliance in Parliament last week, not a single dollar of new funding was to be found by his adoring audience.
Supply and Confidence: “In for a Penny, In for a Pound”
The Government has been working closely with the NDP to maintain the supply and confidence agreement and avoid an unwanted election. While the relationship remains strong and a spring or summer election seems to have been averted, the Liberals are now inextricably tied to their promise to implement a full dental coverage plan for Canadians by 2025, and increase financial supports for Canadians suffering from inflation.
A Seinfeld Budget…
CTV News took the unprecedented step of breaking away from its live coverage of the budget speech after only two and a half minutes, selecting instead to move straight to commentary from third-parties. The message: when you strip a budget of any surprises and lean into your tendency to be everything, everywhere, all at once, your plan comes dangerously close to becoming a budget about nothing.
Nothing – no election, no non-confidence motion, no immense grievance, no immediately detectable relief from the current pinch of inflation, no new grief, no complicated new policy prescriptions to explain from scratch – will emerge from this budget.
And that is the point. By choosing to focus on three major initiatives that it hopes will satisfy Canadians, the Government has given itself the opportunity to fight another day, and reset in advance of a future election.
Finally, by investing so deeply on its transition to a clean economy, it has armed itself with an opportunity to once more attempt what it has so far been unable to achieve since Justin Trudeau became Leader of the Liberal Party, namely make the environment and a clean economy transformation the ballot-question in a federal election.
Budget 2023, A $7 Billion Odyssey
In today’s Budget, Finance Minister Freeland announced plans to reduce expenditures such as management consulting, other services, and travel by $7.1B over five years. Of note, “the government will focus on targeting these reductions on professional services, particularly management consulting.”
The often-cited figure of $20B for professional services needs to be taken with a grain of salt. The Public Accounts of Canada, which are tabled in the House of Commons every October, is a wealth of information about how the government spends funds on its operations. However, one needs to be cautious about drawing conclusions due in part to the poor classification and nature of the recorded expenses.
For example, in the fiscal year 2021-2022, of the $17.5B spent on Professional Services – fully $4.8B was government-to-government transfers (gray slice below). As odd as it may seem, the government accounts for services that one department acquires from another department or level of government in the Professional Services volume of the Public Accounts. We recast some of the expense categories to get a better sense of where money is actually spent.
Allocation of $17.5 Billion Professional Services Expenses
Public Accounts of Canada 2021-2022
($ Millions)
Taking a closer look at the payments recorded in the Public Accounts, approximately 25% – $3B – was paid to firms that provided “business services”, “temporary help”, or staff augmentation (dark blue and dark gray slices). In contrast, when the expenses for “management consulting” (green slice) amount to only $537M and “informatics services” (dark blue slice) amounts to $1.1B. Combined, these two categories add up to ~ $1.7B – which happens to be the amount of ongoing savings the Minister of Finance has called for.
Our sympathies go out to those in government tasked with finding $7.1B of savings over five years. Perhaps if the Receiver General and the Treasury Board Secretariat just acknowledged reality when accounting for government transfers – the government could “save” $25B over five years.