What to expect from budget 2023 as ‘storm clouds’ gather over Canada’s economy – National
Canada’s Liberal government is on the hook for the 2023 federal budget.
A year of soaring prices and rising interest rates has put new stresses on Canadian households struggling to make ends meet.
Landmark investments in the green transition from the US are heating up as the Canadian government seeks to remain competitive with the economic giants south of the border.
And after years of increased spending and a rapid recovery from the COVID-19 pandemic, storm clouds are gathering over the economy, putting new scrutiny on government coffers.
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The government’s finance minister and deputy prime minister, Chrystia Freeland, said the 2023 budget would include “targeted” assistance to help vulnerable Canadians, but would “add fuel to the inflationary fires”. ‘I promised I wouldn’t do that.
Can Ottawa weather the competing pressures and economic uncertainty while meeting the Canadians’ goals?
This is what economists think.
Budget planning in ‘hard times’
The federal budget comes at a “troublesome time” for Freeland and Prime Minister Justin Trudeau, says Sahil Khan, vice president of the University of Ottawa Institute for Fiscal Studies and Democracy.
Khan, who is now in his third term in office, told Global News that the second budget of the Liberal Party’s current mandate is set to arrive amid “changing circumstances.”
He said liberals had the “good luck” of taking over a big revenue surprise in the previous budget, which helped the government spend more while remaining financially sustainable. says.
But Khan warns that government revenues will dry up as the economy slows, despite rising spending priorities.
Among the pressures facing the government are new healthcare agreements with states, defense spending both at home and in Ukraine, and already promised on the transition to green energy.
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Khan said that “storm clouds” were gathering and a possible recession was looming, and that if the worst-case scenario materialized, the federal government would “spend some of the powder” for emergency spending to revive the economy. You will feel the pressure to keep it dry.
Randall Bartlett, senior director of Canada’s economy at Dejardins, said despite a stronger start to the first quarter than most economists had expected, the government remains uncertain about how much the economy will slow this year. said they are still plagued by the uncertainty of
“It’s a difficult environment to come up with an overall budget plan,” he told Global News.
How does inflation affect budgets?
Rapid economic growth from the COVID-19 recovery helped boost government revenues, and Ottawa spent much of this money helping Canadians hard-hit by the pandemic.
Although these programs have largely ended, government spending per capita is still 11.3% higher than in the pre-pandemic era, according to a recent analysis by the Bank of Montreal.
Bartlett says government revenues generally increase during periods of high inflation, but the federal government is about to experience the “insidious” nature of price pressures against recessions.
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Inflation-linked government spending support such as Older-Ages Assistance (OAS) is now costing more, just as subsiding inflation and a cooling economy are about to slow government revenue growth. he says there is.
“Even if the revenue tailwinds start to wane, the spillover effects of high inflation will continue to be seen on the spending side,” says Bartlett.
But Bartlett added that the government faces “a lot of political pressure” to keep spending to help vulnerable households.
Some economists believe that too much direct financial support from the federal government will force Canadians to use the donations to buy more goods and services, re-stimulating the economy, so the final I am worried that this will actually accelerate inflation.
A senior Bank of Canada official, who has aggressively raised benchmark interest rates over the past year to cool the economy and keep inflation in check, said an early end to pandemic-era stimulus could keep inflation in check. I’m here.
Ottawa’s 2023 budget will be closely monitored by the Bank of Canada. why?
To avoid fueling inflation with government support, Ottawa needs to be “targeted” in its spending plans, says Lindsay Tedds, an associate professor at the University of Calgary.
Mr Tedds said liberals would either double the GST deduction again or guarantee it, rather than a drastic tax cut that would ease the burden on households but could unintentionally spur more spending. told Global News that it could replenish the income subsidy provided.
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That way, she says, government spending will be better spent on Canadians who need it to cover basic necessities.
“We’re just trying to get them by paying rent and being able to buy things like groceries. So there’s no inflation impact,” she says.
Khan said the government could also “shift” its commitments by spending more three, four or five years after the budget window. By doing so, he says, liberals can ensure that funds are available to respond to emergencies while also showing Canadians that they are listening to affordability concerns.
US Pressure Demands Action
Economists who spoke to Global News said the federal government feels pressure to respond to the US’s anti-inflation legislation. The law has rolled out a number of incentives for businesses to invest in the green economy south of the border.
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Despite restrictions on government funding, liberals will need to put a “down payment” on some of the clean energy priorities they’ve been talking about for years, Khan says.
He argues that unless Ottawa develops its own incentives to compete with the United States, Canada risks losing jobs and investment from big companies in the green economy.
“If we don’t look like we’re doing the same for the industry, they’re going to suck that capital and those jobs,” Khan says of the U.S.
“For this budget, we’re going to need something that’s actually pretty specific. You can’t tell the whole story.”
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Tedds agrees, saying that announcements on measures such as carbon capture and storage are attractive to Alberta.
But Ottawa cannot always match American capital, and Bartlett says the government should focus spending on industries where Canada has a “comparative advantage.”
He highlights critical minerals as one area where Canada can position itself within the green economy.
“Champagne Taste” and “Beer Budget”
Tedds says Canadians should “soften their expectations” about the upcoming budget.
Canada could avoid its worst recession, but the outlook is “too unpredictable” for the Liberal government to offer significant relief or big items in this budget, she says. .
Tedds wants the job insurance program overhauled to make sure the government is ready to help Canadians through a recession should the country’s unemployment rate begin to rise.
“We really need to prepare for a recession. There are people who are doing it,” she says.
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Despite all the pressure liberals are facing in his third term, Mr Khan said the Trudeau government still needs to show that it has “a fire in its stomach” and that it will have consequences for the Canadian people. says it can.
“I think this time it will be more about sweating than aspirations,” he says.
The Liberals still have the ideas and must prove they can move forward with projects important to Canadians, as opposed to the newly elected government providing a budget for the changes in the first spending plan.
He expects liberals to devote substantial budget text to already announced health care spending, announced in February as a sort of “victory wrap.”
If the government wants to achieve all spending priorities while maintaining the federal debt-to-GDP ratio (an important fiscal guardrail that not only the government but also credit rating agencies and international observers are looking at) , may need to find new sources of funding.
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With revenue sources drying up and the Liberals under pressure to maintain fiscal guardrails, tax increases aimed at businesses and high-income earners may be considered, Bartlett said.
Otherwise, liberals may have a “champagne taste,” but they’re running on a “beer bottle budget,” he says.
“They’re not going to put everything on their wish list,” he says. “So they need to be mindful of that and exercise real discretion.”
— Using files from Touria Izri of Global News